Private equity’s recipe for creating riches has two main ingredients: debt and tax perks. Joe Biden wants to turn the second one into a fond memory. If the Democrat becomes U.S. president after the election on Nov. 3, his tax plans could undermine buyout barons’ business model and pit shareholders, clients and employees against one another.

The Carry Trade

At the heart of Biden’s assault on companies like Blackstone and KKR is capital gains tax. The levy on profit from selling assets is currently lower than that applied to rich Americans’ income, and has been since 1990. Right now, the gap is up to 17 percentage points. Private equity managers love this arrangement, because they collect hefty rewards in the form of “carried interest,” a share of the returns made by their funds that tax authorities see as a capital gain.

For at least a decade, politicians have shied away from taxing this form of compensation, which looks like pay for performance, as income. Under Biden’s plan they wouldn’t have to make that call: for people who earn over $1 million a year, both capital gains and income would be taxed at the same rate of nearly 40%. Buyout firms’ star managers would lose out big time.

But it gets worse for them. A higher capital gains tax would also penalize big shareholders of companies they hope to buy and the executives they employ to run them, who are often paid in stock. Many entrepreneurs might be less willing to sell in the first place; those that do may demand higher prices.

The result could be less rain for the private equity rainmakers. Persuading their clients – pension firms, sovereign funds and so on – to pay more for the privilege of investing would be a tough sell. Right now, a typical buyout firm creams 20% off the profit from an investment. Assume that’s taxed at the 20% capital gains rate. If Biden gets his way, that rate would double, and the firm would need to raise its bounty to 26% of the investment profit to get the same after-tax amount. Maybe some blockbuster firms can wangle that; most can’t.

Move it or lose it

Some of those involved are already taking action, according to industry sources and advisers, looking into offloading investments before any tax change can kick in. The clock may already be ticking, since legislation passed even late in 2021 could conceivably be applied retroactively to the beginning of the year. A similar rush for the exit happened in December 1986, after President Ronald Reagan equalized the two tax rates, albeit at the relatively low level of 28%. Alternatively, some firms are considering moving from high-tax states like New York to low-tax states such as Florida, a shift which would help minimize their overall tax burden. Paul Singer’s Elliott Management is one of those, according to Bloomberg.

There’s an extra barb for Blackstone, KKR and Carlyle. As well as hiking capital gains tax, Biden also plans to increase the corporate income tax rate from 21% to 28%. Most private equity firms are partnerships, meaning they pass untaxed profit onto their owners, who are taxed on the income. But these three companies took advantage of President Donald Trump’s tax cuts that took effect in 2018 to turn into so-called C corporations – a change that meant they started paying income tax on their earnings. With the corporate tax rate at just 21%, there seemed little to lose. At a 28% rate it no longer seems so smart, although they surely anticipated that tax rates can rise as well as fall.

That further reduces buyout firms’ scope to reward their executives. A higher corporate tax rate means their earnings will be lower, putting downward pressure on their stock-market valuations. The pain for holders of their stock could be magnified because former Vice President Biden also wants to increase the tax on dividends to nearly 40%. It’s hardly compatible with fatter pay packages for staff.

In sum, shareholders, company founders, employees and investor clients could all find that private equity’s magic recipe loses its flavor if Biden prevails. It’s quite the reversal. Buyout moguls like Stephen Schwarzman have amplified their billions by taking advantage of the U.S. tax system. Just during Trump’s four-year term, Blackstone’s shares have generated double the returns of the S&P 500 Index, with rivals Carlyle and KKR close behind. Some loopholes, like the taxation of carried interest, have been open for too long. Biden could be the boogeyman who finally slams them shut.

Will Biden be private equity's boogeyman and slam shut lucrative tax loopholes?

As I stated in my comment on Friday, I'm not convinced Biden will beat Trump. It will be close, Trump can still win according to some experts, especially if he wins key battleground states like Florida and Pennsylvania.

But I must admit, after walking away from Leslie Stahl in a 60 Minutes interview and doubling down on his claims that rising US coronavirus cases are "Fake News Media Conspiracy" as hospitalizations rise, he's sounding more unhinged and totally out of touch with reality and hurting his credibility and chances of getting re-elected:

Trump says rising U.S. coronavirus cases are a 'Fake News Media Conspiracy' as hospitalizations rise https://t.co/oVo9dIr7qO

— CNBC (@CNBC) October 26, 2020

Sometimes I openly wonder whether President Trump really wants to be re-elected. 

So, if Biden wins, does that spell big trouble for private equity? Maybe, I'm not convinced of this either. Big private equity donors have donated millions to Biden's campaign so it will be interesting to see exactly what tax policy changes will actually materialize in a Biden administration.  

Remember the book I keep peddling on my blog, C. Wright Mills' classic The Power Elite. Read it a few times and you will understand all you need to understand about how democracies and capitalism actually work.

Big decisions are always being made in the background to favor the Power Elite, and the private equity industry is definitely run by elites. 

Why do you think the Fed increased its balance sheet by $3 trillion and then decided to buy junk bond ETFs? To save the economy? No, it was to directly bail out elite hedge funds and private equity funds.

Ray Dalio conveniently omits stating this outright in his latest 'shocking' warning on capitalism but I have no issue pointing it out because it's the truth.

And here's the kicker folks, nothing is going to change, something the late great comic genius George Carlin brilliantly pointed out in his famous skit on the American Dream. 

Anyway, getting back to private equity, we are at the top of the cycle and the industry is preparing for a big downturn.

How do I know? Check out these tweets:

Should 401ks Rush COVID Relief To Private Equity Wolves? via @forbeshttps://t.co/zYRmQAZ2kv

— Leo Kolivakis (@PensionPulse) October 26, 2020

Blackstone’s private equity business raised $8 billion for a fund that aims to hold companies for longer periods than its typical investments https://t.co/NiRXEeknFy via @markets

— Leo Kolivakis (@PensionPulse) October 26, 2020

Private equity shifts its attention to renewable energy https://t.co/D6u28B1wwS

— Leo Kolivakis (@PensionPulse) October 26, 2020

The shift into alternative energy is a call on Biden but whenever you read private equity is looking to expand to retail investors, you know the top is near. 

Edward Siedle is right to be very critical of this push into 401(k)s but even he misses the bigger point.

Last week, I discussed how Ontario Teachers’ Pension Plan and Lightyear Capital agreed to acquire wealth management firm Allworth Financial from Parthenon Capital.

I learned that several years ago, Ontario Teachers'Private Capital did a detailed attribution analysis on all their private equity deals and here's how they ranked them by profitability from worst to best:

• Fund investments were the worst because carry and management fees ate up most of the returns
• Minority syndication (a lower form of co-investments where you get a some slice of a deal, say 5%) were second worst because these deals are typically done in bad vintage years when deal activity is high and GPs are looking to unload investments.
• Teachers' purely direct deals were the second most profitable deals but they weren't plentiful.
• And the most profitable deals by far were jointly sponsored co-investments (50/50) where Teachers' and their partners sourced and underwrote deals jointly, reducing fee drag. For example, Teachers' deals in Dematic (with AEA Investors) and CPG International (with Ares), both returned roughly 8x the money. These are phenomenal deals.
  

What is critical to understand is Ontario Teachers', just like CPP Investments, has a specialized PE staff doing jointly sponsored co-investments which is where they get their best bang for their pension buck.

And as was explained to me, not all co-investments are profitable, especially not minority co-investments which are considered direct deals but are really nothing more than syndication where GPs unload small stakes to smaller LPs who can't do jointly sponsored co-investments (and sometimes to larger LPs).

Now, think about it. If Ontario Teachers', CPP Investments and other large Canadian pensions are finding their PE fund investments aren't as profitable as jointly-sponsored co-investments, then why do they continue t invest in PE funds?

Answer: to gain access to large co-investments to reduce fee drag.

The critical point I'm trying to make here is after you count for carry and management fees, private equity funds have less than stellar returns.

And unlike big Canadian pensions, Joe and Jane 401(k) are not gaining access to large co-investments to reduce those big fees. Capiche?

Of course, maybe I'm very jaded when it comes to PE moving into retail. Mark Wiseman seems to be in favor of it:

Individual #investors have always faced a near blanket restriction when it comes to investing in #privateequity funds. Could this letter present a feasible way for Americans to make their first significant investments in the sector? @Forbeshttps://t.co/6CO784Wq9S

— Mark Wiseman (@MarkDWiseman) October 25, 2020

Still, even Mark has noted that PE managers are turning to specialist borrowing facilities to ensure their highly leveraged strategies can survive the pandemic, but there are growing concerns that the use of these complex financing deals poses new threats to investors:

#PE managers are turning to specialist borrowing facilities to ensure their highly leveraged strategies can survive the #pandemic, but there are growing concerns that the use of these complex financing deals poses new threats to investors.
- @FThttps://t.co/NX8fGcjW1s

— Mark Wiseman (@MarkDWiseman) October 17, 2020

What else? it is is worth noting Blackstone just raised $8 billion for a long-term private equity fund. This tells me they see this as the top of the market, want to lock in money for longer and reduce fees to their main LP investors:

The firm’s second core private equity fund will be more than 70% larger than its first, which closed in 2016. Investments will focus on essential business services and companies with compelling intellectual property or content, Joe Baratta, Blackstone’s global head of private equity, said in an interview. The group’s previous long-term fund made investments that included music-rights company SESAC Holdings and Servpro Industries, a provider of cleaning and emergency restoration services.

“These are businesses that have really clear and transparent operating models,” Baratta said. “Here we’re deploying capital for a decade plus. That’s attractive and more cost efficient for large investors.”

Blackstone, the world’s largest alternative-asset manager, has remained a fundraising machine even amid the uncertainty caused by the Covid-19 pandemic. It brought in $47.6 billion during the first half of the year, after a record $134.4 billion haul for all of 2019. The private equity industry bills itself as a safe custodian of investor cash in volatile times, pointing to its strength in the wake of the 2008 financial crisis.

Managers were stung by hefty losses early this year but their performance has largely rebounded along with the broader market. All Blackstone segments posted gains in the second quarter, led by a 12.8% advance for private equity funds. The New York-based firm is scheduled to report third-quarter results Wednesday.

Again, investors prefer these long-term private equity funds because they get better fee arrangements (but they allocate more to the fund) and better alignment of interests (as these long-term funds avoid the typical churning of investments where PE funds sell portfolio companies to each other every three years to raise another fund).

It also allows Blackstone to cement its position as the world's largest alternative-asset manager and sends a message to new competitors that they remain the kings of alternatives and will not be outdone by new entrants in the space, like BlackRock's long term private capital which hasn't gained traction among institutional investors (it might ultimately gain more traction with high net worth individuals and retail).

Remember, the name of the game for Blackstone and BlackRock is asset gathering. BlackRock is the king of public markets but fees have been significantly compressed there over the last decade(s) so they shifted their attention to private equity in an attempt to gain a foothold in lucrative private markets where fees remain juicy (but coming down there too).

Blackstone is a fundraising machine and tends to raise the most assets when a big crisis occurs 9so its investors can capitalize).

And while Blackstone is raising assets like crazy, one of its largest competitors is running into big trouble.

Over the weekend, Bloomberg published an article on how Apollo's investors are revolting given its founder's ties to convicted convicted sex offender Jeffrey Epstein:

It keeps getting worse for Leon Black.

Over the past week, Black’s giant investment firm, Apollo Global Management Inc., has confronted one question after another about his decades-long relationship with convicted sex offender Jeffrey Epstein.

First, his own board ordered an external review prompted by Black himself. Then a Pennsylvania pension fund paused new investments -- and the state of Connecticut has done the same. One major consultant -- a gatekeeper to $160 billion of investor commitments -- has urged clients to hold off, and another is considering taking similar action.

Clients who for years enjoyed some of the best returns on Wall Street are reconsidering their ties to Apollo amid renewed scrutiny over Epstein, spurred by a New York Times report earlier this month and given fresh attention from an unsealed deposition of Epstein associate Ghislaine Maxwell.

Investors distancing themselves from the firm show how serious the issue has become for Black and his general partners. Some clients aren’t convinced that the review, which will be handled by law firm Dechert LLP, will be enough to clear Black’s name, according to people familiar with the matter.

A freeze in new money could hurt Apollo at a time when it’s trying to raise $20 billion for several new funds. The pandemic-spurred turmoil in the credit markets is a prime investing opportunity for the firm, which is known for buying struggling businesses. Apollo is seeking to take advantage of market dislocations as well as invest in private debt, people with knowledge of the matter said in April.

Black’s growing troubles reflect the changing politics of the investing world, where major funds have become more sensitive to environmental, social and governance matters. The new focus means that even the prospect of lucrative returns may not be enough of a lure in the midst of a scandal.

“While performance is always going to be an important factor, increasingly it’s not the only factor,” said Gerald O’Hara, an analyst at Jefferies Financial Group Inc. “In some respects, there’s some willingness to sacrifice performance for a company that’s run with good governance, good ethics.”

Investment adviser Aksia told clients not to give new money to Apollo, Bloomberg reported Friday, while Connecticut said it is halting new investments with the firm. Earlier in the week, the Pennsylvania Public School Employees’ Retirement System said it would stop making additional investments in Apollo for now, and consultant Cambridge Associates is considering not recommending the firm to its pension and endowment clients.

While Black faced pressure in the immediate aftermath of Epstein’s arrest last year, investor angst was rekindled by a New York Times report that he had wired at least $50 million to Epstein after his 2008 conviction for soliciting prostitution from a teenage girl. The article didn’t accuse Black of breaking the law. Apollo shares have fallen about 12% since the story was published on Oct. 12.

“We are firmly committed to transparency,” Apollo said Friday in a statement, noting that Black has been communicating regularly with investors. “Although Apollo never did business with Jeffrey Epstein, Leon has requested an independent, outside review regarding his previous professional relationship with Mr. Epstein.”

In a letter to Apollo’s limited partners this month, Black said he deeply regretted having had any involvement with Epstein. Black said he had turned to him for matters such as taxes, estate planning and philanthropy, and that nothing in the Times’ report was inconsistent with an earlier description of their ties.

It will be tough for investors to cut ties completely with Apollo as private equity funds typically lock up capital for years -- a trade-off many are willing to make with the promise of high-flying returns. And unless the inquiry unearths something more damning, clients may ultimately decide to look the other way, said three investors who asked not to be identified.

It’s particularly unappealing for clients to pull away given the firm’s stellar returns. Apollo’s flagship private equity fund, which opened to investors in 2001, has delivered annual gains of 44%, Bloomberg reported in January.

But even yield-starved investors looking to pump more money into private equity may choose to go elsewhere in future, as rivals flood the market with new offerings.

“It’s a very competitive race for capital and one thing that we continue to see in fundraising is it is in many ways more similar to a political process than a capital-raising process,” said Sarah Sandstrom, partner at Campbell Lutyens, which helps private equity firms raise money. “You are telling your story, creating relationships with investors.”

I'll tell you what every major institutional investor is thinking right now: "Please God, don't let any photos of Leon Black hanging around Jeffrey Epstein's pedophile island surface, we're cooked!"

The who's who of major pension funds, sovereign wealth funds and endowment funds invest in Apollo because it's the best credit fund in the world (see a comment I wrote back in May on how IMCO took a big stake in Apollo's new fund). 

Black's ties to Epstein cast a shadow over what has thus far been an illustrious career. 

I don't know what to make of this but in a heightened "ME TOO" environment where investors need to guard against even the faintest appearance of supporting a potential sex offender, it's obvious some are adopting the strategy of shooting first and asking questions later.

The fact that two gatekeepers  are shunning the firm altogether (one is considering it) speaks volumes, everyone is edgy and nervous, especially if Ms. Maxwell makes any accusations implicating Black and others (she hasn't yet).

To put this into proper context, it's the equivalent of a nuclear bomb going off in the private equity industry. Well, maybe not that bad but it's bad.

I reckon a lot of investors are going to their PE teams right now and asking them bluntly: "What's our exposure to Apollo? give it to me straight!".

Reputation risk is a huge risk for big public pensions and obviously, for Leon Black himself.

I don't get some of these powerful guys, why did they get bamboozled by Epstein who has sleazeball written all over him is beyond me. I wouldn't have touched this guy with a ten foot pole if I was Black and other powerful people who fell for his charm. 

This is a lesson to all powerful and not so powerful people: choose the people you hang around with very carefully, it can come back to bite you in the rear end or worse, front end when you least expect it.

Alright folks, once again, please remember this blog is comments where I express my opinions. I certainly don't think I have a monopoly of wisdom, so if you have different opinions, feel free to share them.

Also, it's a good time to remind all of you, this blog runs on donations, so if you like the content (or hate it but still read it every day), please do the right thing and contribute to it using PayPal options at the top left-hand side under my picture. I thank all of you you show your appreciation by donating, it's greatly appreciated.

Tomorrow, I'm discussing the secular shifts in real estate, and if you liked this comment, I guarantee you'll love that one!

Below, Nicolas Rabener, found and CEO of FactorResearch discusses why private equity provides the same economic exposure as public equities. Given this, private equity should not be considered as a diversifying strategy (h/t, Brett Friedman).

Rabener raises the same concerns and criticisms as many academics and these issues are very well known to institutional investors but he doesn't get it. 

In private equity, the approach matters, if you get it right (fund investments with top funds and jointly sponsored co-investments with them), you're definitely much better off over the long ruin than investing in public markets (all you PE critics and academics, take three hours to read CPP Investments' fiscal 2020 annual report).

Next, Apollo Global Management Llc. has announced an independent investigation into Leon Black’s ties to Jeffrey Epstein. The private equity giant now faces a possible investor revolt after more information emerged about its co-founder’s ties to Epstein. Bloomberg’s Dani Burger reports on “Bloomberg Markets: European Open.”

I agree with the reporters, that $50 million transferred to Jeffrey Epstein is at the core of this investigation and any way you slice it, it looks terrible for Black and his firm, raising a lot of suspicions. 

I hope they clear this matter up relatively quickly and I'm certain a lot of nervous pension fund managers reading this comment hope so too.

Lastly, Trump's chances of winning have plummeted to just 4% according to the latest polls but don't heed too much into these polls, there's no doubt in mind it will be a close race and Trump might still pull off a miracle if he wins Florida and Pennsylvania. Doubt it, especially after yesterday, but you never know.

If Biden wins, it looks like bad news for private equity but I wouldn't bet on it. The Power Elite are always ten steps ahead of everyone so don't count PE out just yet.

Commercial real estate prices have plunged this year as people stopped going into offices, and retail businesses were disrupted. That could lead to a significant amount of losses for banks, according to a recent report.

In previous downturns, commercial property loan losses were “heavy” and there are worrying signs that such a trend could be repeated this time during the coronavirus-induced slowdown, Oxford Economics’ Adam Slater said in a report.

In a worst-case scenario, Slater said these loan losses would “materially erode” bank capital.

“Large (commercial real estate) price declines generally translate into big losses for banks. Write-offs of (commercial real estate) loans made a big contribution to overall bank losses in the last two major downturns,” wrote Slater, an economist at the firm.

During the 2008 great financial crisis, for example, such loan losses accounted for between 25% and 30% of total loan write-offs in the U.S.

This time those risks look highest in the U.S., Australia, and parts of Asia such as Hong Kong and South Korea. In these economies, lending growth has been high, with “significant” loan exposure. But commercial property prices are already sliding, especially in Hong Kong, the report said.

In Singapore, office rents had their steepest decline in 11 years in the third quarter, official data showed on Friday. Rents for office space fell 4.5% in the latest quarter till September.

The firm’s index of global commercial real estate prices based on seven large markets show they are down 6% from last year.

“Could the coronavirus crisis lead, via the commercial property sector, to long-term problems for the banking and financial systems? … we think it is a genuine concern,” Slater wrote.

“Currently, hotels are running at very low occupancy rates, retail units have seen sharp declines in customer footfall, and many offices are closed or running with very low staffing levels,” he said. “In these circumstances, rental income and debt repayments from affected sectors are in grave doubt.”

Oxford Economics analyzed 13 major economies and found that write-offs of 5% of loans would amount to the equivalent of a loss between 1% and 10% of banks’ tier 1 capital, their primary funding source including equity and earnings. The biggest impact would be felt in Asia, it said.

Bond investors may also be at risk.

In the U.S., around half of the lending by this sector is not made through bank loans, and that includes the issuance of bonds in the sector, according to the report. In parts of Europe and Asia, that proportion of borrowing through the non-bank sector has risen to 25% or more, in recent years.

“In the case of property funds, (commercial real estate) downturns could see a rush by investors to redeem their holdings leading to fire sales of assets — amplifying price declines and broader loan losses,” said Slater.

But there’s one bright spot. Banks are in better shape to absorb them as compared to a decade ago. Their capital and leverage ratios are around double the levels a decade ago, Slater said.

Following the financial crisis, reforms were introduced to mitigate risk and improve the resilience of the global banking sector, by maintaining a certain leverage ratios and levels of reserve capital.

The moderator was Amber Kanwar, a well-known BNN Bloomberg anchor and reporter appearing on The Open and The Disruptors who took time off her maternity leave to moderate this panel. She did a great job, asking many good questions. 

Was this panel discussion worth the $75 plus tax I paid to watch? Yes, any time you get Blake Hutcheson, Jo Taylor and Jeff Wendling in a discussion, you'd be an idiot not to pay to watch what they have to say.

Having said this, my own feeling is there should be a standard price for these web events, say never more than $50 flat (including tax) and they should make them free for students.

I wish I could embed the full discussion below but it wasn't free. Luckily, I jotted down a lot of notes for those of you who didn't see it. 

Let me begin by telling Blake Hutcheson that I don't know where Mark Wiseman gets off texting and razzing you about the way you dressed today, you looked fine to me, very comfortable and I liked the picture of the ship behind you.

Blake is the eternal optimist and he certainly didn't disappoint today. Whenever you feel like slicing your wrists because of all the catastrophic news on television, take some time to listen to Blake Hutcheson, he'll restore your faith in humanity and the future.

I'm more of a pessimistic cynic by nature (part of my Greek genes) and was agreeing with a lot of things Jo Taylor was saying, not that he's a pessimist and hopeless cynic, far from it, he's more of a realist and offered great insights.

And Jeff Wendling? I'd say he's in between Blake and Jo with his views but all three of them agreed on the important points.

Anyway, Amber Kanwar began by asking the three CEOs who have the distinction of starting to work recently as the pandemic hit what their thoughts are.

They all said they feel privileged and honored to be leading these great organizations but the pandemic has obviously presented challenges.

Blake Hutcheson quoting Mark Wiseman said they "measure a quarter over 25 years, not three months." He is proud to serve over half a million active, retired and deferred members.

He said we will get through this pandemic and was very pleased at how the troops at OMERS were able to come together and deliver under these difficult circumstances.

Jo Taylor said he began working on January 1st and they couldn't foresee the pandemic or the upheaval of going 100% from working at the office to 98% of the staff working from home. 

Still, they managed to do it all very well, placing their members first by making sure they continued to respond to all their needs and questions.

He said he has 35 years of experience working at various companies and even prior to the pandemic, had a steep learning curve taking over the top job at Teachers'. He said even as a CEO, it's been challenging mentally at times to adapt to the new normal of working from home.

In fact, he mentioned that OTPP shifted its attention lately to focus on its employees' mental health because of the extraordinary circumstances they are operating under.

Here, I have to pause to commend Beth Tyndall, OTPP's Chief People Officer, for being so open about her struggles of coping with the pandemic on LinkedIn. That takes courage and it demonstrates strength and character.

[Note: Remember, mental health is critical, depression and other mental illnesses can affect anyone at any time, not just during a pandemic, so don't be ashamed to reach out for help if you need it. My father and brother are both psychiatrists and they've seen it all. If you get help, you can treat even the toughest mental illness. If you refuse to get help, it will only get worse.]

Jeff Wendling said he is honored to serve Ontario's front line workers during this difficult time, reassuring them their pensions are safe. 

He said there was major market chaos back in late February and March and yet the transition to working from home went very smoothly on all fronts (investments, member services, etc.) and he commended HOOPP's technology team (see an earlier comment of mine on HOOPP's IT journey).

Canada's Policy Response

The discussion then turned to Canada and the policy response. 

Blake Hutcheson commended our central bank and federal government for providing liquidity to the financial system and to people that needed it. 

Citing a conference call with Steve Poloz, the former Governor of the Bank of Canada, he said the economy hit a "ditch" and needed liquidity to get out of it (Jeff Wendling later corrected him and said the former governor used the word "crater").

Blake sees a K-shaped recovery with winners and losers. He mentioned he met up with the CEO of the Cirque du Soleil and they had to cut almost all their staff (3900 employees) as revenues went to zero.

He said "a lot of people are sitting comfortably at the office" but we need to recognize the challenges of many small businesses struggling, like restaurants forced to close again as they try to balance their inventory and keep their employees afloat.

Blake said fiscal support is absolutely needed but thinks the economy is recovering and that down the road, the risk might be too much stimulus will lead to an overheated economy.

He thinks low rates are here to stay and cheap debt is helping to sustain the housing market as people move from city condos and apartments to single family homes in rural and urban areas.

As far as oil & gas, he said other countries control supply and it's tough to predict how oil prices will move in the near term.

Jo Taylor was "slightly less bullish" on the Canadian economy citing lower oil prices impacting Alberta and high household and corporate debt. He said if there's a significant price correction in housing, it will be bad for the economy.

However, he said fiscal and monetary policies in Canada are "more coordinated" with the Bank of Canada standing ready to monetize debt.

Jo said Canada's large pensions can lend money to bigger companies but small and medium sized businesses that are "on the edge" need support from banks, governments (and the BDC and EDC).

Jeff Wendling also praised the policy response and thinks it's still needed and he was generally constructive on the recovery going on right now but said we're not out of the woods and there are challenges ahead.

Shift Toward Private Markets

The discussion then went into asset allocation and the shift toward private markets.

Jeff Wendling said back in 2006-2007, HOOPP decided to adopt a liability driven investment (LDI) strategy and they bought a ton of Canada 30-year bonds to hedge their liabilities and protect against downside risk.

A bit fortuitously, they did this a year before the great financial crisis in 2008 and that really helped them pass through that crisis.

They rode the yields down on those 30-year bonds but are now faced with a problem because the yields on those 30-year bonds are too low, so they are looking to invest more in infrastructure, real estate, private equity and other yield enhancing strategies (see my comment on HOOPP's LDI 2.0 approach).

Jo Taylor said they traditionally matched assets with liabilities but because their plan is more mature than other plans (ratio of active to retired members is lower), they had a more balanced portfolio investing more in private markets and investing more internationally. 

He warned however that returns in core infrastructure, private equity and real estate are coming down and you need to be extremely selective in the deals you enter. "It's harder to execute on private markets, it's more challenging and returns are lower."

Blake Hutcheson agreed and said the "tsunami of capital" flooding these assets is negatively impacting valuations and returns. 

Still, he said they're looking to double their total assets in the next ten years and will continue to invest half in private markets.

He said they differentiate assets during the pandemic in three buckets:

1. No touch red zone because of COVID.
2. Green zone where opportunities abound because of COVID.
3. A grey zone where a disconnect is happening giving rise to long-term opportunities because of COVID.

Blake didn't use the colors, I did, but he was explicit that he sees opportunities in Office space which is interesting because my last comment was on what I see as a secular shift in real estate.  

Blake used to head up Oxford Properties so I'd expect him to be more optimistic than me and he could very well turn out to be right (I remain very worried).

He said even if offices take a 20% hit, some people will come back to offices, so say that's 10%, and leases are five years on average, if not longer, so he doesn't see a massive hit materializing.

He said "great office buildings will continue to do well."

Jo Taylor said they see value in Europe and Asia and are taking more sector views here and looking at deals closely to make sure they can add value in tow ways:

1. Help a business grow organically 
2. Help businesses that are not getting liquidity because of their capital structure

Jeff Wendling said HOOPP is really just launching its infrastructure portfolio and they too see opportunities in private and public markets in Europe. he said they will continue to grow their real estate and private equity portfolio all over the world.

The China Factor

The conversation then got interesting because they talked about direct investing in China. 

Jo Taylor brought up an great point stating: "It's really easy deploying capital in China but really challenging extracting it. The rule of law isn't there, the regime can basically take actions which impact your investments overnight."

He said OTPP is doing direct investments there along with local partners, but they're also looking at Asia Pacific more broadly as other countries will benefit from China's growth (they recently opened up their Singapore office). 

He also said China impacts companies here, like Apple, citing increased nationalism there and how it can impact these giant tech companies in North America.

Blake Hutcheson agreed, "you can't ignore China but it's tricky". OMERS is currently invested 3% in Asia and looking to go to 10% but it's a "long game, a relationship game".

Jeff Wendling said HOOPP has 2-3% of its assets in emerging markets and it will increase them as growth will be there but they will do so mostly through public markets.

Still, HOOPP did a private equity deal in China and will look at all private market deals there if they make good sense and if they have the right local partners.

United States Elections

The panelists were asked about the upcoming US elections and they all said no matter who wins, they are playing the long game there and the US remains the most important country in terms of foreign investment (public and private markets).

I think Blake said OMERS has 30-35% exposure to the United States and they're going to continue investing there over the long term, both with great partners and directly when they see opportunities, including in growth equity and venture.

Jo Taylor also said the US remains an important country for their long term investments but he said the election might bring some turbulence and they stand ready to capitalize on any opportunities.

He said you need strong local partners there but also "bring our Canadian heritage" to improve businesses there.

Jeff Wendling said 50% of their credit exposure is in the US and a significant chunk of private equity and real estate too.

ESG, Diversity & Inclusion

The panelists ended by talking about ESG, diversity & inclusion.

Jo Taylor said Canadian pensions got the "E and G" right but the focus has shifted on the "S".

He said they are very long term institutions, custodians and answer to their members and need to respect and enhance their brand in Canada and the rest of the world. 

He warned against the tendency to go for the "quick buck" doing things that undermine value, your brand, and your partnerships.

He explicitly stated in ESG, "you can just talk the talk, you need to walk the walk".

Blake Hutcheson agreed and said they look at everything through an ESG lens.

He said "it's not all about the returns", it's about the people, the brand and enhancing long-term relationships.

Jeff Wendling said HOOPP looks to be "a good corporate citizen" and ESG can be a win-win for everyone over the long run.

In the wake of George Floyd's tragic death and widespread BLM protests this past summer, the panelists were pressed hard on what they are doing to address systemic racism.

Blake Hutcheson said there's no question it's time to act to address long-standing structural issues. 

They are looking at their hiring policies across the organization, doing programs to look at unconscious biases, but he said it will be a slow and incremental process and he doesn't have all the answers which is why he sits on a diversity & inclusion committee along with the Head of HR to try to figure it out, getting feedback from everyone.

Jeff Wendling said he signed the BlackNorth Initiative and is committed to it. They too are reviewing their hiring practices, addressing unconscious biases in their training and elsewhere and he strongly believes that diversity & inclusion is a win-win and will strengthen the organization over the long run.

He said they have committees for gender diversity, people of color, LBGTQ community and aboriginals (no mention of people with disabilities however, which disappointed me but nobody talks about them).

Jo Taylor didn't beat around the bush, he flat out stated they take diversity & inclusion very seriously within their organization and in the companies they invest in.

In particular, he mentioned gender diversity and said at their investee companies that at least 30% of their board members have to be women (more challenging in Asia because of cultural reasons).

He said they are looking at all levels of their organization to bolster diversity & inclusion, "not just at the junior ranks."

I was happy Jo mentioned that and think he's absolutely right but he too admitted more work needs to be done and they have a lot of room for improvement, as do all of Canada's large pensions.

I'm glad Amber Kanwar who I believe is of Indian descent pressed them on diversity & inclusion and they responded very frankly stating they are doing a lot but more needs to be done.

Alright folks, I really don't get paid enough for all these great comments I provide you.

I'll wrap it up here and if there is anything I need to edit, please let me know.

Once again to the panelists and the moderator, great job, I really enjoyed this today and hope they eventually make it public so I can embed it here.

Below, Blake Hutcheson, president and chief executive officer of Ontario Municipal Employees’ Retirement System (OMERS), discusses the pension fund's investment strategy amid Covid-19, and how OMERS integrates ESG factors into its investment decision-making processes. He also talks about governments and private investors working together and finding projects that both sides want to build and invest in.

Before we continue with Episode 3 today, let us take a minute and quickly look at the summary takeaways from Episode 2 last week or "what nobody told you about long term investing."We started Episode 2, challenging the notion that long-term investing is about the horizon. And what we concluded was that long-term investing is not only about the horizon but about wealth maximization. Then the natural question was, "how one maximizes wealth." And we looked at how prices, cash flows and reinvestment drive wealth maximization.

Although it is commonly accepted that a long horizon's final wealth is driven mostly by cash flows, it was surprising to find that prices, cash flows and reinvestment contribute equally at the 15 to 20-year time horizon. Price alone contributes 70 percent of the terminal wealth and a five-year horizon. And then we ask the question, how long is the long term?

This means that if we consider horizons of 5, 10, 15, or even 20 years, we cannot disregard managing the price risk. We cannot just ignore prices and hope cash flows will do all the heavy lifting for us.

We also looked at an example that illustrated that achieving the long-term return alone is not sufficient because cash flows or liabilities appear within the horizon. In this case, in the presence of liabilities, the long term becomes a series of short terms.

As such, the end-horizon (terminal) wealth now depends on how the returns appear throughout this period. This simply means that the short terms' path or the price risk needs to be managed. We also illustrated that what needs to be managed is not just the returns themselves but also the gap between the long-term required return and the current achievable short- and medium-term returns at different horizons.

We briefly illustrated this with a stylized example of a portfolio over a 40-year horizon. We demonstrated that a 2 percent gap of the achievable versus required returns for a typical pension fund portfolio results in a 40 percent probability of zero assets over a 40-year horizon. It is an inevitable 100 percent loss for a 4 percent gap over the same horizon. We then referred to a real-life example from the recent experience of CalPERS in the United States, where a gap of more than 3% has led to a ruinous funding ratio of 68 percent. Finally, we also demonstrated how avoiding adverse outcomes is critical to maximizing wealth.

The roadmap of the series so far

The avid readers of the series would have observed already that the topic of TFM spans across most of the organizational, investment, and client aspects. So far, we have presented over 2 hours of content and over 200 slides. It is a good point to pause and outline the progress of the series thus far.

A typical design of an investment strategy is based on several essential phases.

First, one needs to formulate a set of beliefs, or the fundamental question of "why." In the series, we have outlined a number of both organizational and investment beliefs related to TFM. The beliefs then lead to formulating the strategy, or the question of "what" is the strategy to implement the beliefs. Again, in the series, we have been talking about organizational and investment strategy conclusions and defining the investment objectives, which is part of the strategy itself. The optimal objective of TFM is, in fact, the focus of Episode 3's discussion.

Once the strategy is defined, then comes the question of "how" one implements the strategy. It is about the framework, process and how to build the capability. The final aspect is the governance and the evolution of the organizational structure. This is the endpoint of our journey and our series. We will be talking about the Canadian pension model 2.0 and the critical role of TFM to enable its implementation and functioning.

The next slide summarizes everything we concluded regarding the organizational and investment beliefs, organized following our roadmap. First, we started with the organizational beliefs and why there is an increased focus on TFM today. We spent most of Episode 1 discussing this topic. Then, in Episode 2, we formulated several investment beliefs that stemmed from discussing what nobody told you about long-term investing. 

The discussion on the organizational and investment beliefs led us to the conclusions of the strategy to implement the beliefs. We discussed these throughout Episodes 1 and 2. The next slide incorporates all the key points.

Now that we have outlined the progress so far, it would help visualize the journey once more on our series roadmap.

The purpose of Episode 3 today

Episode 3 today is the final stop in discussing one last important point on the TFM strategy topic.

Let us illustrate the purpose of Episode 3 using our roadmap and a simplified example. An investor concludes that stocks and bonds would be the best asset classes to hold (for whatever reasons). The investor has just formulated an investment belief.

The investor then creates a portfolio of stocks and bonds. By doing this, the investor hires a multi-asset portfolio manager and creates portfolio stocks and bonds. By doing this, the investor transforms the investment belief into an organizational (hiring a multi-asset manager) and investment strategy (creating a stock/bond portfolio).

The question then is, what would be the investment objective of this portfolio of stocks and bonds, and how the multi-asset manager will be judged for its success. The investor defines the investment objective as minimizing the stock-bond portfolio's risk to achieve a 6% return. This happens to be Harry Markovitz's portfolio optimization objective.

We just described the link between investment beliefs and the organizational and investment strategy with the example above. The investment strategy cannot exist in a vacuum without having an investment objective.

Then, what is the investment objective of TFM and how different it is from the optimal objectives based on the Markovitz efficient frontier, or any of its extensions, or an asset-liability objective (surplus optimization, stochastic optimization, liability-driven investing)?

We talked at length about the need to manage the short- and medium-term returns to maximize wealth. Before even venturing into the topic of what framework, process and capability one needs to manage such a process, we still have not yet discussed how to define what is optimal when we are talking about a path-dependent multi-horizon asset allocation problem.

We just described the equivalent of Harry Markovitz's portfolio optimization and efficient frontier, and hence, the title in the introductory slide to this episode. You are certainly curious about what Rome has to do with it. You have to watch the series, and it will all become clear once you understand the logic and see the physical experiments.

We intentionally avoided any mathematical interpretation but instead opted to help practitioners and executives interpret the optimal objective intuitively via visualization of the critical concept and real-life experiments inspired by physics phenomena. Again, it is best if you watch the video presentation.

For completeness, the investor in the simple example above might also add private asset classes as a strategy. A similar question then arises: What would be the optimal investment strategy objective for these private assets, and how does it fit within the overall portfolio one? This should already sound familiar to the discussion we had in Episode 1 about the four pillars of the total portfolio, and what matters for private assets (and wealth maximization and the importance of cash flows).

Managing the long and winding road

To better understand why we are talking about some of the things today, it would be helpful to turn back time and revisit some of the points we made in Episode 1 and 2. If you recall, in Episode 1, we discussed the difference between asset allocation ("AA") and TFM, and we said that AA is primarily about what assets to own, while TFM is primarily about when to own the assets and how to own the assets.

And in this context, we introduced another way to view the same problem as AA, and we used this analogy of turning AA upside down. We meant by the notion of turning AA upside down because instead of constructing portfolios based on asset classes to achieve future outcomes, we could construct a policy portfolio that contains outcomes instead of asset classes — an outcome-oriented policy portfolio. Then, at any point in time, one can hold any asset mix, which leads to achieving these outcomes within an acceptable variation of these outcomes. This analogy is akin to managing the "long and winding road" around the long-term return objective, which in a time-dimension representation is an upward sloping line (e.g. the 6 percent constant return objective).

As such, TFM is about managing the long and winding road to achieve long-term outcomes. It includes all the investment strategies we discussed in the "roadmap" section earlier in this post: the efficient flow of capital, managing beta given short and medium-term returns, and also managing the beta of the private asset classes to allow them to maximize cash flows, managing cross-asset beta in public markets, avoiding adverse outcomes and ensuring liquidity and efficient implementation.

Now, we mentioned that TFM manages the long and winding road... ...there is this saying that all roads lead to Rome. Researchers analyzed more than three million road journeys to check if that was really true. And it turns out it is true; the longest road network is to Rome.

And although all roads lead to Rome, which road we take matters. Suppose we know with a certain probability the expected returns of the various asset classes over different time horizons, and we know our end goal objective. The question then becomes, what is the optimal portfolio to hold TODAY, given that we know with a certain probability the future path of returns over time.

Think about it as the daily commute dilemma similar to finding the shortest drive to a final destination in the presence of congested traffic (and congested traffic, in this case, it is low or high expected returns).

We have been mentioning throughout the series this notion of "short- and medium-term expected returns," or "expected returns over different horizons." At this point, it would be useful to finally introduce the actual term, which is the "term structure of expected returns," similar to the concept of the term structure of interest rates. It is central to managing a path-dependent process, and we will talk about it in detail in Episode 4.

Given that expected returns evolve through time (the term structure of expected returns changes), TOMORROW, we will need to make a new decision and hold the portfolio that now has the highest probability of achieving the end outcome. And the next day again. This is the path-dependent nature of the portfolio decision.

By evaluating the portfolio today through the prism of the term structure of expected returns, we can now also manage the gap between achievable expected returns (the ones that come from the term structure) and the long-term required return (the end outcome). We can evaluate whether the achievable returns would be higher, equal or lower than the required returns.

And choices need to be made. For example, if the current achievable returns are lower than the required return, asset classes will need to be overweighted/underweighted, or leverage might be necessary to achieve the required return. Depending on how future returns are expected to unfold, increasing or decreasing the level of liquidity might be necessary. This is all about today's decision, given what we know with a certain probability about the future.

Now, we have all the possible paths between these asset classes at different horizons. And of all the possible paths, there is always the possibility to do nothing, which effectively means to hold the same combination of assets throughout the time horizon and to hope and pray to achieve the required return outcome at the end.

And this should sound already familiar to you because this is the proposition of AA (asset allocation), where we define an initial set of assets, and we define long-term expected returns. And we hope and pray that these long term expected returns would materialize, which means that our outcome would be materialized as well. As long as we are right about the long-term expected returns, "do nothing" is an optimal proposition.

There are also two requirements for the do-nothing case to be the optimal one. First, we have to have constant long-term expected returns through each one of these horizons. Second, remember that long-term expected returns are a sufficient objective as long as we do not have any cash flows or liabilities between time horizons. Both these propositions are highly unlikely; returns would never be the same throughout the period. And of course, there are always cash flows and liabilities, even more so for mature pension plans.

Thus far, the discussion brings the question of which is the optimal path of the portfolio to arrive safely and on time in our proverbial Rome, which minimizes time and maximizes wealth, given expected returns at different horizons and transaction costs.

To illustrate this, the presentation borrows some ideas from physics.

Now, let us say we want to determine the fastest way for an object to travel between points A and point B, point B being our proverbial Rome. And for this object, there is also the influence of gravity and friction, which you can think of as the returns and transaction cost. We know that time equals distance divided by speed. Then, we can minimize time by minimizing distance, or we can minimize time by maximizing speed. Unfortunately, neither the shortest path nor the highest speed is the optimal solution. It turns out, there is a third optimal path.

Now, this challenges the pension "Nirvana" because the shortest distance, which one could think of as having steady returns, does not lead to the fastest arrival at the final destination. The optimal path is not only the fastest, but it also has another property as well. Let us say we have three portfolios that start at the same time on the optimal path. And the only difference is that they are at a different point on the optimal path curve. But in the end, they all arrive at the same time. In other words, as long as the portfolio always gets back to the optimal path, it will arrive "on time."

Yet again, the inconvenient thought that "distance," similar to the "horizon," are suboptimal (to say the least) objectives. The "daily commute" dilemma describes it very well.

Now that we illustrated that the notion of distance does not matter and that what matters is how quickly and safely one arrives at the destination, let us revisit the notion of safety.

If you recall, in Episode 2, we discussed how one maximizes wealth. So, it was about producing inflation-adjusted cash flows or having growth; reinvesting at the best current returns; avoiding negative returns, eliminating hidden or unwarranted exposures and costs, having unencumbered liquidity when needed, and not selling assets at the worst time.

Why liquidity is paramount to "safety," avoiding negative returns is second best. If you recall, in Episode 2, we demonstrated how avoiding negative returns leads to maximizing wealth.

Earlier, in Episode 1, we discussed the three critical reasons for the increased focus on TFM. And these three reasons were organizational development, client evolution, and the external environment. Importantly, in the client evolution discussion, we briefly mentioned that the client maturity profile leads to an increased sensitivity to adverse outcomes. Let us now see why client maturity and avoiding adverse outcomes are increasingly important today as part of the TFM objective.

We already mentioned the pension clients' increased sensitivity to adverse outcomes. But how much precisely has this sensitivity increased?

The presentation shows that the annual increase in contributions required to offset a one-time negative portfolio since the late 90s valuation cycle has virtually doubled in the most recent valuation cycle. The main reason pension clients today are twice as vulnerable to adverse outcomes as they were before is the confluence of many of them having net cash outflows and the market environment. Market environment determines how market returns happen, and as we saw earlier, how market returns happen matters for the final wealth.

When markets are strong, the net outflow risk is not apparent. However, market downturns are more likely to require contribution rate increases, and even worse, prolonged downturns may require further structural adjustments.

To manage this market and cash flow risk, one needs a path-dependent allocation, which considers the current market environment and medium- and short-term expected returns and manages adverse market outcomes.

This all brings back the discussion about portfolio outcomes. Pension client needs are evolving, as many plans are maturing. This means that they are more sensitive to investment risk, income, liquidity, the path of returns and end wealth. This means that indiscriminate growth will not be the easy solution. Clients need more outcome-oriented portfolio management. Pension managers would have to adapt and manage and provide outcomes. These outcomes could become the primary measure of success while empowering more efficiency and effectiveness in managing client portfolios. 

This concludes our Episode 3, so let us look at the summary takeaways. In today's episode, we illustrated how to think about the optimal objective of TFM:

•  It is not about "long" or "short," but about "fast" or "slow" and "safe." 
• The optimal objective is also about what decisions about the portfolio we need to make today, given what we know with a certain probability about the future and the required outcome. 
• A path-dependent, multi-horizon objective allows us to evaluate the gap between achievable and required returns and make decisions about the asset class weights, leverage, and liquidity. 
• Finally, pension clients today are more sensitive to adverse outcomes than ever. The main reason pension clients today are twice as vulnerable to adverse outcomes as they were before is the confluence of many of them having net cash outflows and the market environment.

We keep returning to the conclusion that Total Fund Management requires a path-dependent allocation, minimizing adverse outcomes, efficient portfolio maintenance. In Episode 4 next Thursday, we will discuss what one needs to do all this work.

Episode 3 concludes our discussion on the organizational and investment beliefs and the strategies and objectives to reflect these beliefs. In Episode 4, we will embark on the topic of implementation: framework, process and capability.

Let me begin by thanking Mihail Garchev for another great comment on integrated Total Fund Management.

If you have not seen Part 1 and 2, you can do so by clicking here and here.

I highly recommend you take the time to read our previous comments and watch the previous comments in order to get the right foundations.

Once again, the material covered here isn't available in textbooks, consultants don't cover it properly or at all, it can only be produced by someone like Mihail who not only has extensive experience and knowledge, he's also an excellent teacher and it comes across in the clip below.

In fact, Mihail was really proud of Part 2 last week and we both felt it didn't get the attention and traction it deserved, but I actually prefer Part 3.

Why? It's not too long, goes over the required material from previous parts very well and it packs a lot of critical issues which capture the essence of what TFM is all about.

Let me explain. Say we had the "model Canadian pension portfolio":

• 35% in Public Equities
• 20% in Fixed Income
  
• 12% in Private Equities
• 15% in Real Estate
• 10% in Infrastructure
• 5% in Credit (includes Private Debt)
  
• 3% in Hedge Funds
• Leverage up to 30%

Now, this is just an example, don't go repeating this the THE Canadian model portfolio, it's not because all pensions are different, they have different maturities, some use more leverage than others, some are more exposed to private markets than others, etc.

I'm just using this as an example. Say our actuaries and quants at our model Canadian pension used the profile of our liabilities, set expected returns for each asset class, plugged it into some optimizer, and voila, these are the recommended weights to achieve the long-term expected return.

And then what? Then, we trust the model, set these weights on cruise control and let the individual teams go to work doing what they're suppose to be doing, adding value over their benchmark. 

The strategic asset mix is basically set on cruise control, with tight ranges. Then, we can use tactical asset mix to overweight or underweight any asset in any year and use leverage to take advantage of opportunities as they arise, but it's this strategic asset mix which drives long-term returns and it's basically static.

There's a common belief out there that all that matters is getting the strategic asset mix right and the rest is irrelevant.

To be sure, it's critically important to get the strategic asset allocation right but nothing can be further from the truth when people say "that's all that matters". Mihail demostrates this very well.

CalPERS and many US public pensions got their strategic asset mix right but the outcome (most of them are underfunded and some are chronically underfunded) is very different from Canadian pensions which are fully funded.

Why? One big reason is plan design, Canadian pensions got it right, sharing the risk equally among active and retired members.

But another critical reason is governance and their ability to operate independently from government,  like a business, which helps them attract top talent to manage the bulk of assets in-house. 

Importantly, in a record low rate environment, there are three things that can impact your investments in material ways even if you get the strategic asset mix right:

1. Execution risk: This is basically the risk of not realizing on your value creation plan. This impacts private markets mostly and it's critically important because that's where you get your cash flows to reinvest in asset classes. OTPP's CEO Jo Taylor talked about this in yesterday's panel discussion which I covered here).
   
2. Costs: In a record low rate environment, fees and costs matter more than ever and can significantly detract from long-term performance.
3. Margin of error is lower: In fact, in a low rate environment, not only do you need to get your strategic asset mix right, you need to get all your investment activities right, there's simply no room to make errors because one bad year can set you back years.

Now, I'm going to let you in on a little secret. I love actuaries, some are better than others, but they're all super smart people and they yield enormous power at pensions. 

Actuaries don't like tinkering with strategic asset mixes, it creates volatility for the contribution rates and that gets governments and unions on their case, so they typically set it and forget it and only tinker with it when there's a really good case to be made to add an asset class.

But strategic asset mixes are based on long-term expected returns and even the best industry minds get those wrong (Jeremy Grantham, Clifford Asness and others are often completely wrong on their long-term forecasts).

In general, setting probabilities on financial outcomes is very difficult for a lot of reasons:

• Disruptions happen all the time. It could be technological, a pandemic, political, social or whatever.
• It might be a secular shift. I just finished writing a comment on whether there's a secular shift in real estate happening right now.
  

• More policy intervention: How do central banks adopting QE Infinity impact future returns?
• Tsunami of capital: Yesterday, OMERS' CEO Blake Hutcheson mentioned the tsunami of capital chasing private market deals, impacting future returns. This is something I've alluded to many times which is why execution risk matters now more than ever.

The point I'm making is it's hard to ascribe long-term expected returns to many asset classes because the world is constantly evolving.

I mentioned to Mihail that I took Honors Econometrics and History of Economic Thought at McGill during my undergrad years and our professor, Robin Rowley, really got into the Keynes-Tinbergen debate and what other great economists (like Hicks, Hayek, Knight and others) thought of probability in economics.

In fact, Robin Rowley and Omar Hamouda wrote a book, Probability in Economics, which brilliantly captures the nuances of how different economists thought on the subject (not an easy read but economists will love it).

The point of all this is you can have the best strategic asset allocation ever and still fall short of your goal, and Mihail shows this with his CalPERS example.

The other point worth making is tactical asset allocation and Total Fund Management are two very different things.

Most pensions lose money on TAA but TFM is much deeper, much more important to realize on your final wealth outcome.

It involves managing the path to the final outcome, the long winding road:

• How do you reinvest dispositions in private equity?
• How do you manage downside risk at any given time?
• What is the approach you're using in Private Equity and Private Debt?

Go back to read my comment on OTPP getting into wealth management where I discuss the importance of jointly sponsored co-investments and how they're the most profitable PE investment, more than purely direct, syndications (a lesser form of co-investments), and fund investments where fees take a big chunk of long-term returns.

And while Private Debt is a hot asset class, I wouldn't put guys like PSP's Scuderalli or CPP Investments' John Graham in the same boat as others who have the wrong approach.

Anyway, I've rambled on far enough, hope Mihail and I gave you a lot of food for thought here.

Below, Episode 3 of the seven-episode series "Introduction to Integrated Total Fund Management" presented to you by Mihail Garchev, former VP and Head of Total Fund Management of BCI. I really like this episode, not too long and packed with great insights.Thank you, Mihail.

Stocks fell on Friday, led by major tech shares, as Wall Street wrapped up a difficult week in which coronavirus cases rose, U.S. fiscal stimulus talks broke down and traders braced for next week’s presidential election.

The Dow Jones Industrial Average closed 157.51 points lower, or 0.6%, at 26,501.60. At one point, the Dow was down more than 500 points. The S&P 500 dropped 1.2% to 3,269.96 and the Nasdaq Composite pulled back 2.5% to 10,911.59.

The Dow and S&P 500 fell 6.5% and 5.6%, respectively, and posted their biggest weekly losses since March. The Nasdaq lost more than 5% over that time period and also had its worst one-week performance since March.

Those weekly losses came as the seven-day average of new coronavirus cases in the U.S. hit an all-time high this week, according to data from Johns Hopkins University. In Europe, Germany and France announced new lockdown measures to curb the virus’ spread.

“Massive policy stimulus, positive medical developments and high hopes for a return to pre-pandemic economic activity levels have provided a solid boost to equity markets,” strategists at MRB Partners wrote in a note. “However, mounting new economic restrictions, particularly in Europe, despite being forecastable and in lagged response to the re-acceleration in COVID-19 infections, only caught investors’ attention this week, triggering sharp losses.”

In Washington, Senate Majority Leader Mitch McConnell adjourned the Senate until Nov. 9, making it highly unlikely for Democrats and Republicans to reach a deal on new fiscal stimulus before the election on Tuesday. Treasury Secretary Steven Mnuchin, meanwhile, accused House Speaker Nancy Pelosi of miscasting the state of the stalled negotiations, calling it a “political stunt.”

Traders had been betting on both sides reaching a stimulus deal before Tuesday’s vote as some recent data shows the economic recovery could stall without new aid. This is all taking place as traders prepare for choppy market moves next week amid the U.S. presidential election.

Data compiled by RealClearPolitics showed former Vice President Joe Biden holding an average lead of more than 7 percentage points over President Donald Trump. However, that lead has narrowed since early October.

Gina Bolvin Bernarduci, president of Bolvin Wealth Management, said several of her clients were concerned about the election outcome and how it would impact their investments.

“We have had more calls about the election recently than we had during the big sell-off in March,” said Bernarduci. “I think it’s going to be a few volatile days, but there are factors that affect the market more than who wins the election.”

“Investors should also keep in mind what happened four years ago. Everybody thought that if Trump won, that would have been bad for the market, yet we made [more than 100 new highs] in four years,” Bernarduci said.

The Dow, S&P 500 and Nasdaq all posted their first back-to-back monthly losses since March. The Dow lost more than 6% this month while the S&P 500 and Nasdaq each declined by more than 5% in October.

Apple and Amazon fall on earnings, Alphabet gains

Shares of Apple fell 6.4% after the tech giant reported a 20% decline in iPhone sales and failed to offer investors any guidance for the quarter ahead. Amazon dropped 5.9% even after the e-commerce giant reported blowout third-quarter results with a big beat on the top line.

Meanwhile, Twitter lost more than 21% after the social media company reported user growth that fell short of expectations. Facebook was off by 7.6% amid a surprise decline in active users in Canada and the U.S.

Shares of Alphabet bucked the negative trend for tech stocks, rising 3% after the Google parent company posted quarterly results that topped Wall Street expectations.

Alright, it was a terrible week for stocks -- the worst weekly selloff since June -- so let's jump into it by looking at the performance of the top S&P sectors this week:

As shown above, Tech stocks (XLK) led the rout this week, down 7%, followed by Industrials (XLI), Consumer Discretionary (XLY, mostly Amazon), down 6.9% and 6.6% respectively. Healthcare (XLV) and Energy (XLE) were both down 6.1% and the best performing sector was Utilities (XLU) which was also down 4%.

Any way you slice it, it was a terrible week for stocks and would have been even worse if the Fed's Plunge Protection Team didn't come in Friday afternoon at 3:30 when the Dow was down over 500 points to buy stocks (sneaky little devils, aren't they?).

Still, even the Fed's PPT couldn't stem the onslaught of selling that took place as investors hunker down waiting to see who wins the elections next week.

A few observations on what led to this week's selloff:

• There was no October surprise. Republicans and Democrats couldn't or didn't want to set their differences aside to come up with a much needed stimulus package to help millions of Americans living on the edge.
• Global coronavirus cases rose by more than 500,000 for the first time on Wednesday, a record one-day increase as countries across the Northern Hemisphere reported daily spikes. In fact, global daily COVID-19 cases have risen by nearly 25% in less than two weeks, with Europe being hit particularly hard (the US isn't far behind).
• Investors are fretting over a "Blue Sweep" which will hit wealthy Americans hard. Under Biden's proposal, unrealized capital gains would be taxed at 43.4% at death -- a rate that includes taxing those gains at ordinary income tax rates, which he's vowed to raise to 39.6%. It also includes a 3.8% net investment income tax.
• Big Tech stocks are selling off despite reporting strong numbers because the outlook remains uncertain and a lot of them ran up a lot going into earnings, so they were do for a major pullback. It also didn't help that Big Tech CEOs clashed with Congress this week in a pre-election showdown, making investors jittery that antitrust legislation is coming and can potentially break up tech giants and the monopoly they enjoy. 
• Hedge fund manager David Einhorn who runs Greenlight Capital, wrote in a letter “we are in the midst of an enormous tech bubble,” but noted “September 2, 2020 was the top and the bubble has already popped.” Reuters saw a copy of the letter. Einhorn said he’s “adjusted” his portfolio’s short-book with bets that stock prices will fall by “adding a fresh bubble basket” of mostly second-tier companies and “recent IPOs trading at remarkable valuations.”

Now, I don't know if David Einhorn is right, he's made these big proclamations in the past and has been wrong, but I'm totally with him on this call and think a lot of "new tech darlings" are cruising for a bruising here. 

And let me be specific, I'd be actively shorting shares of Zoom (ZM), Zscaler (ZS), Fastly (FSLY), Docusign (DOCU), Square (SQ), Snowflake (SNOW), Twilio (TWLO), Overstock (OSTK), and of course Tesla (TSLA), Einhorn's favorite short (and that of Jim Chanos, they both lost big on this short position).

But shorting these and other high flyers that ran up a lot this year isn't easy, you need nerves of steel and it can easily backfire on you.

Any day now, we can expect some news on one or more of the vaccines in trials. Hopefully it's good news and that can send the market soaring (if it's bad, the market will tank), at least initially, then reality will set in.

The Fed and other central banks might announce fresh new liquidity in the form of more QE and speculators will use it to buy more risk assets. 

The amount of central bank intervention is unprecedented, they're literally trying to keep the entire system afloat by injecting massive liquidity into it, but it seems to be backfiring. 

Interestingly, private equity titan Henry Kravis told Bloomberg there’s more turmoil in the markets than any time in his half-century career as investors react to pandemic news:

“I’ve been investing for over 50 years, I don’t remember a time when I’ve seen such volatility as we see today,” Kravis, the co-founder of KKR & Co., said Friday on the Bloomberg Invest Talks webcast. “Just look at our markets in the U.S., we’re up one day 300, 400 points and then the next day, for almost no reason, we’re down 400 to 500 points.”

While he praised global stimulus efforts for keeping economies from collapse, he said markets remain unnerved by the Covid-19 pandemic, especially on the prospects for a vaccine. “Any news coming out of the pharmaceutical industry on progress with a therapeutic or with a vaccine is changing sympathy in the markets,” he said.

“I’ve been investing for over 50 years, I don’t remember a time when I’ve seen such volatility as we see today.” https://t.co/nPRR3IsxkB

— Lisa Abramowicz (@lisaabramowicz1) October 30, 2020

Here's what I replied on Twitter:

Interest rates at record low levels, central banks trying to save capitalism (more like tech moguls, corporate titans, elite PE funds and hedge funds) from prolonged debt deflation are actively engaged in QE infinity, and Mr. Kravis is shocked that volatility is off the charts?

It's crucial to understand we are living in unprecedented times, debt levels are at record highs, interest rates at record lows, central banks are trying to push everyone out on the risk curve, so expect extreme volatility will persist for as long as this is situation persists.

Add to this mix more geopolitical and pandemic uncertainty and you'll see more volatility in markets.

Why am I sharing this with you? Because every time stocks sell off hard, someone warns that another stock market crash is looming. 

Maybe but with rates at record low levels and global pensions and sovereign wealth funds rebalancing every month and quarter, and central banks actively interfering in markets, it's very hard making these one-way doomsday calls.

What was interesting today, and one pension fund manager pointed this out to me late today, is both stocks and bonds sold off, and that can lead to a lot more volatility ahead:

Will the Fed step in to save the day? Most likely but not before we see more weakness in the overall market led by tech shares and especially financials sell off hard:

Remember, the Fed doesn't really care about tech bubbles and busts, it cares a lot more if bank stocks start cratering and another credit crisis develops (see a comment I wrote earlier this week on a secular shift in real estate).

That's what we need to pay attention to but so far, while high yield debt is rolling over, it remains strong (backed up by the Fed):

If for any reason credit markets start seizing up again, then you can be sure another stock market crash is coming.

Right now, chalk October up to a very bad month in stocks, especially many of the "Fastly" type stocks which are getting roiled:

This one is actually on my watch list as it's due for a big bounce but trade it very tightly or risk getting your head handed to you as it can sink a lot lower from these levels.

Lastly, here is the best hedge fund trade of the year:

Steve Cohen officially owns the New York Mets after MLB approves deal https://t.co/HRsqprf3KN

— Leo Kolivakis (@PensionPulse) October 30, 2020

Love him or hate him, Steve Cohen knows how to invest in winners, and he'll enjoy being the new owner of the Mets.

Alright, that is it from me, here are this week's large cap winners and losers:

Below, earlier this week, Financial Post’s Larysa Harapyn speaks with Rosenberg Research’s David Rosenberg and BMO Capital Markets’ Brian Belski about the the US election results might mean for the market.

Earlier today, CNBC's "Halftime Report" team discussed how they're investing amid the market sell-off as fears accelerate over increasing coronavirus cases.

Ed Yardeni of Yardeni Research also joined CNBC's "Halftime Report" team earlier today to discuss how he views the market sell-off and how factors like tech valuations, the upcoming election and surging virus cases play into his strategy.

Lastly, earlier this week, Mikio Kumada, Asia executive director and global strategist at LGT Capital Partners, discusses David Einhorn’s comments that markets are in an bubble. He spoke on “Bloomberg Daybreak: Middle East.”

Companies may submit a financing request by filling out the form on www.cdpq.com/equity25-3, where they can also find more information on the fund, including eligibility criteria and details on the members of its strategic committee.

You can read all the details of this new fund here and below and fill out a request form here.

Equity 25³ is an investment fund of $250 million to be deployed over four years with the goal of increasing diversity and inclusion in companies in Québec and Canada. It is the largest Canadian fund ever created to target companies that leverage diversity as a vector of development and expansion.

Our Offer

• A $5-million to $30-million investment in your company.
• Operational guidance to help implement and execute a customized diversity and inclusion plan.
• Value-added support through access to diversified expertise, our international network and our ability to secure relationships.

Your commitment

• People of diverse backgrounds (e.g. women, visible minorities, Indigenous peoples) must represent at least:
  • 25% of your Board of Directors
  • 25% of your management team
  • 25% of your shareholding
• Achieve this objective within five years following the confirmation of your financing.

Eligibility criteria

To submit a request for financing, you must:

• Be based in Québec or elsewhere in Canada
• Take concrete action on diversity and inclusion
• Demonstrate strong growth

Specific Criteria

SME

• Solid economic foundation: quality management team, strong financial performance and healthy balance sheet 
• History of profitability
• Potential to enhance your operational efficiency

Tech Company

• Solid economic foundation: quality management team, considerable market size and sustained annual growth
• Competitive technology offering 
• Predictive and proven business model: significant growth in sales and high level of recurring revenue

Why a fund for diversity and inclusion?

Studies have made it clear. Greater diversity in our companies fosters better decision-making and has a positive impact on:

• Innovation
• Risk management
• Productivity
• Financial performance 

That’s why we want to encourage SMEs to set measurable objectives on becoming more diverse, and benefit from this additional lever to drive performance.

Stewardship investing at CDPQ includes diversity as one of three strategic priorities. For several years now, we have actively promoted gender diversity through various initiatives.

On Friday, I had a very brief but insightful discussion on this new fund with Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing. 

Let me first thank Kim for taking time out of her busy schedule last week to chat with me. I've said it before and I'll say it again, Kim is extremely professional, intelligent, super nice and it's always a pleasure talking to her or exchanging thoughts via email.

She doesn't like it when I state this but she'd make a great leader of CDPQ one day, if that day ever comes.

Anyway, when I read the press release above, I pointed out to her and Charles Emond, CDPQ's CEO, that there was no mention of people with disabilities on that press release and that's just plain wrong.

Kim agreed with me: "Yes, you're absolutely right, thank you for pointing this out, we want to help all disenfranchised groups grow their SME including people with disabilities. The same goes for members of the LBGTQ community which we also didn't specifically mention in the press release." 

She also told me that CDPQ has an internal committee looking at hiring more people with disabilities by 2022 and they're working with the la Commission des droits de la personne et de protection des droits de la jeunesse (see more about this commission here).

That was music to my ears and it's about time CDPQ starts hiring more people with disabilities but as I keep stating on my blog, I'll believe it when I see it. (The same criticism can be laid on all of Canada's large pensions which have zero representation of people with disabilities or a infinitesimally negligible representation).

Moving on, Kim told me the impetus behind this new Equity 25³ fund came from employees at CDPQ and the depositors (ie. CDPQ's clients) embraced it. "It was a grass roots fund and employees are very proud of it."

They should be. Think about that. Employees at CDPQ were able to voice their concerns following events that took place this past summer (George Floyd, Breonna Taylor and Ahmaud Arbery) and they got senior management and depositors to sign off on this new fund.

Actually, Kim told me three people in particular deserve the credit: Wils Theagene, Senior Director, Québec; Martin Laguerre, Managing Director, Capital Solutions and Tom Birch, Managing Director, Global Venture Capital and Technologies.

All three of them sit on Equity 25³'s Strategic Committee along with Kim and some other key members:

This is one hell of a committee made up of different people of different backgrounds, some who have extensive experience and others who are less well known but are equally important as they bring fresh perspectives to this committee. I'm confident they will do a great job deploying the $250 million to SMEs committed to embracing diversity & inclusion.

Kim reiterated the ticket sizes are $5 million to $30 million and they aren't just targeting gender diversity but all diversity and the new fund isn't limited to only Quebec, which is good given that CDPQ's dual mandate is to focus more on developing Quebec based companies.

Having experience working at the Business Development Bank of Canada (BDC), I applaud this new venture and think it's very wise to make it pan-Canadian.

In fact, I told Kim that CDPQ might want to work with the BDC or another large pension (CPP Investments) if this venture proves successful to do follow-on funds that target SMEs.

Let's not kid ourselves: systemic racism is alive and well in Canada, not just the United States.

We love pointing the finger to our neighbors down south but we have serious issues here too and we need to promote diversity & inclusion at small and large businesses.

Let me be even more blunt: when it comes to diversity & inclusion, the free market does a terrible job allocating equal opportunities to disenfranchised groups. 

Again, this is me talking, not Kim Thomassin, but I suspect she agrees with me.

The world in 2020 is much more diverse than what it was twenty years ago.

CDPQ itself is more diverse than it was 20 years ago when I was there, far more diverse.

I give credit to Michael Sabia, the former CEO, for promoting competent men and women from all backgrounds to senior positions and to Charles Emond for continuing to do so.

In fact, if I had a chance to sit down with Charles Emond, Louis Vachon, Guy Cormier, Jean-Guy Desjardins and other leaders of Quebec's financial community, I'd tell them straight out: "You need to do more to promote diversity & inclusion or else Quebec will permanently lag behind other provinces."

I'm not mincing my words here, these are my views, I'm unapologetic and if you have different views, feel free to email me and I'll post them here.

This afternoon, I had to go pick up my wife who teaches at an elementary school in Park Extension. It's one of the poorest neighborhoods in Canada which is currently undergoing gentrification and it epitomizes multiculturalism. 

I love that neighborhood, it's authentic, many immigrants from all over the world have passed through there including my parents a very long time ago for a brief period. 

Today, I saw young Sri Lankan, Pakistani, Indian and other kids from immigrant parents from around the world playing with French, Anglo and European Canadian kids (gentrification means there's a good mix of socioeconomic backgrounds and cultures).

What went through my head? Twenty years from now, Quebec and the rest of Canada will look radically different from today, and that's why diversity & inclusion are now more important than ever.

It's not just a moral duty, it's good business, those that choose embrace diversity and inclusion will lead the pack and those that don't will be left far behind. 

That's one thing I admire about the United States. In the US, if you're good, you will move to the top no matter your race, religion, gender, color, sexual orientation or disability. That's why the US will always lead the world in terms of innovation and growth.

Anyway, back to Kim Thomassin, I mentioned to her that in the US, many public pensions invested in minority owned funds with mixed results. I told her: "I gather this isn't a charity, you expect these businesses to be profitable and/ or grow in the case of tech companies."

She confirmed this and told me they are using the "same KPIs" they use to evaluate other investments, will provide capital AND operational support and expertise to these SMEs and leverage off "CDPQ's vast network in Canada and the rest of the world".

You can read the criteria above, this isn't a blank check to SMEs, they need to make sure they build on diversity & inclusion within five years of getting financing and respect the financial objectives set out above.

Kim Thomassin ended our conversation by stating this new initiative respects CDPQ's strategic goals of building a more diverse, inclusive and sustainable future in a post-COVID world."

She also mentioned Blackstone's new diversity push, making a wider push to increase diversity in portfolio companies and their boards of directors with new initiatives.

Again, the world is changing and leaders like Blackstone aren't reactive, they're proactive, and so is CDPQ with this new initiative.

Once again, I thank Kim Thomassin for another great conversation, always a pleasure, and I thank Serge Vallières for setting up this call. 

Lastly, before I forget, I did speak to Kim about AddEnergie securing $53M financing to accelerate the expansion of its North American EV charging network. Very cool company, read about it here.

And today, I had a Zoom call with McGill Finance professor Sebastien Betermier and McGill Finance student Tania Kuoh, one of the MPIC organizers, regarding an event taking place this Friday morning. 

Sebastien sent me an email last week:

I want to bring to your attention an event that I believe will be of high interest to you. Four years ago, I founded the McGill International Portfolio Challenge (MIPC), a student-led university competition where the brightest finance students from around the World address complex societal issues such as the retirement savings shortfall and climate change. MIPC has since grown into the World’s largest buy-side finance challenge, with $50,000 of cash prizes for the top student teams. This year, 93 university teams from 18 countries and 5 continents have joined the challenge. The theme is about how the finance industry can address the rise of social inequalities and protectionist tendencies in the midst of the current pandemic. We will focus on Brexit and study the portfolio design of a (fictional) newly launched sovereign wealth fund that has a unique triple mandate, which is to make the UK more economically independent and equal while generating risk-adjusted returns over the long-term. Here is a short video about the case prepared by my students. 

The competition is taking place virtually this year and we will live-stream the grand finale of the top 5 teams on Friday Nov 6 9AM-12PM Montreal time. A panel of pension fund executives will hear the proposals and grill the student teams during Q&A, before choosing the winners. Past judges include Geoff Rubin, Chief Strategist at CPP Investments, Ed Van Gelderen, CIO of PSP, and Patrick Odier, head of Lombard Odier. You are certainly welcome to join us. This year’s MIPC is a unique opportunity to mobilize student talent and leadership, bridge academia and industry, show how finance can be a powerful mechanism for social change, and generate solutions that strike a balance between creativity and rigorous pragmatism. You are welcome to look at our past cases and winning proposals at www.mipc.ca. 

I thank Sebastien and Tania for taking the time to chat with me earlier and look forward to seeing this event Friday morning (it's open to all) even if McGill students are not allowed to compete (they can't, they make the cases and talk with pensions all year long so it wouldn't be fair).

Below, Verdun Perry, Head of Strategic Partnerships and Chairman of Blackstone's Diversity & Inclusion Network, Jon Gray and others discuss how Blackstone seeks to attract talent from the broadest universe possible.

Blackstone President and COO Jon Gray recently discussed the historic dislocation in markets brought on by the pandemic, the themes driving Blackstone’s investment strategy moving forward, and the importance of “high conviction” in his approach to investing in an episode of "Talks At GS Presents: Insights From Great Investors."

Third, the McGill International Portfolio Challenge returns in 2020 and invites you to represent your university. Find more information at www.mipc.ca. Looking forward to watching this year's competition.  

Lastly, my favorite disability advocate, Kevin McShan, had a conversation with Jonathon Shanahan on why diversity of opportunities is critically important for the full integration of individuals with disabilities within the workplace. October marked National Disability Employment Awareness Month and Kevin has done more than anyone I know bringing awareness on this important topic. Another great conversation, take the time to listen to it.

Hilary Punchard of BNN Bloomberg reports that according to a recent CIBC poll, 4 in 10 Canadians are worried about COVID-19’s impact on their retirement plan:

Canadians are becoming increasingly concerned about the impact that the COVID-19 pandemic will have on their retirement savings, according to a new CIBC poll.

The findings, published Thursday, found four out of 10 Canadians are worried about how COVID-19 will affect their anticipated lifestyle in retirement, with 23 per cent of respondents unable to contribute to their retirement savings since the pandemic began.

Of those Canadians who feel COVID-19 has impacted their post-work future, 30 per cent said they will need to postpone retirement due to a loss of household income.

The pandemic has also grounded many Canadians’ expectations of travel during retirement, with almost one-third (32 per cent) saying they no longer plan to travel or will travel much less than they’d planned.

On the bright side, it seems the past few months have convinced some Canadians about the importance of saving.

According to the survey, one-in-five Canadians said they’ve realized that they need to pay more attention to their personal finances, and 19 per cent think it’s important to save for their future.

So what exactly did this CIBC poll say? Here is the press release:

A recent CIBC survey finds that the pandemic has impacted Canadians' savings and their anticipated lifestyle in retirement. Four out of 10 (40 per cent) respondents worry about the effect of COVID-19 on their savings and retirement plans, with almost a quarter (23 per cent) unable to contribute to their retirement nest egg since the pandemic began. 

Of those who feel COVID-19 has affected their retirement plans, many feel their expected vision for their post-work lives has changed. Almost a third (32 per cent) no longer plan on travelling or will travel much less than planned. Many Canadians also feel they will need to work longer than expected – for 30 per cent, this is due to a COVID-19-related loss of household income, and for 26 per cent, they feel the pandemic has significantly increased the cost of retiring. Additionally, out of those who intended to downsize their primary residence in their golden years, 40 per cent are now unsure of the right time to make this move.

A higher number of men (68 per cent) say they feel confident about managing investments in retirement, compared to women (57 per cent). Women are also more likely to turn to friends and family for retirement advice (25 per cent), whereas many men (23 per cent) claim they make all decisions about money matters on their own.

"This is a pivotal time to get advice about your ambitions for retirement," said Laura Dottori-Attanasio, Group Head, Personal and Business Banking. "An expert can help re-assess your financial plan, create new estimates for retirement income, identify ways to improve cash flow and adjust timelines if needed to meet your overall goals."

The survey also found:

• 26 per cent of those between the ages of 34-55 and 20 per cent of Canadians over the age of 55 have been unable to contribute to retirement savings since the pandemic began
• Of those who feel COVID-19 has affected their retirement plans, 24 per cent say the pandemic has made them realize they can live with less and will significantly reduce their discretionary spending in the long-term
• Lessons Canadians say they've learned during the pandemic include: there's a need to pay more attention to personal finances (20 per cent); not to panic when markets get volatile (21 per cent); and it's important to save for retirement/their future (19 per cent)

To help Canadians with retirement planning amidst the pandemic, CIBC is hosting a free webinar (in English and French) featuring a number of financial experts on November 3^rd, 2020. For more information and to register, visit the website here.

I have to laugh and cry when I read this:

A higher number of men (68 per cent) say they feel confident about managing investments in retirement, compared to women (57 per cent). Women are also more likely to turn to friends and family for retirement advice (25 per cent), whereas many men (23 per cent) claim they make all decisions about money matters on their own.

Laugh because men are always so foolishly overconfident about how they invest even though it's well known women are better long-term investors and cry because COVID-19 has disproportionately impacted women working in the leisure & hospitality industry and women are far more likely to succumb to pension poverty (for all sorts of reasons but the main one is female participation rates in pension plans have not increased substantially for almost a decade).

Now, has COVID-19 added to Canadians' retirement angst? 

No doubt about it, even if the stock market is well off its March lows, a lot of people are worried about their retirement because interest rates are at historic lows, volatility is high and a common and valid concern people have is whether they will outlive their savings. 

In late September, I had a conversation with Steven McCormick, SVP, Plan Operations at HOOPP, about research they commissioned showing amid the financial hit of COVID-19 – three out of four Canadians would choose greater retirement security over more money now.

Why would Canadians opt for greater retirement security over more money now? A lot of reasons, chief among them, they see the value of a good pension and I believe most Canadians are now confronting the brutal truth on DC plans, namely, they're not a real pension they can count on.

Remember, the gold standard of pensions is a well-governed defined-benefit (DB) plan like most public-sector employees enjoy. They pay into that pension over many years and when the time comes to retire, they can count on their monthly pension payments for the rest of their life.

These are professionally managed pensions where longevity and investment risks are pooled and assets are managed in the best interests of members.

There are two other pension categories.

Quebec's Government recently introduced a new supplemental pension plan. Bill 68's main purpose is to provide a supplementary retirement savings option for Quebec workers by paving the way for the implementation of a new type of pension plan, namely a Target Benefit Pension Plan (TBPP):

TBPPs combine characteristics of defined benefit plans with those of defined contribution plans. As is the case for defined contribution plans, the employer contribution to a TBPP is limited to the amount stipulated in the plan, while risks associated with longevity and return on savings are borne by workers and retirees. However, like defined benefit pension plans, TBPPs offer their members benefits at a certain level that, as opposed to the prevailing situation for defined benefit plans, may be amended according to the plan's evolving financial situation, including the possibility of pensions being reduced.

TBPPs are much better than defined-contribution plans but nowhere near as solid as well governed DB plans, so I'll ascribe them the silver standard of pensions. (I know, retired actuary Malcolm Hamilton likes TB plans, thinks they are fairer for taxpayers but I disagree with him on that point).

The bronze standard goes to defined-contribution (DC) plans which are just another supplemental savings program, offering no guarantees whatsoever as they typically fluctuate with the vagaries of markets and they do not offer their members benefits at a certain level. 

Without being too much of a doomsayer, with a DC plan, if you retire during a bull market, you're lucky, if you retire during a bear market, you're screwed. 

There's a reason why DC plans are "cheap", you get what you pay for. 

Companies love them because they offload pension risk onto employees but for the overall economy and retirement system, they are terrible because they fall well short of covering the retirement needs of pensioners.

Remember, as more and more people retire, those that have certainty of income can spend more during their retirement years and that generates more economic activity and more sales and income taxes for governments. 

Canada has the world's best DB pensions but our retirement system doesn't crack the top five in the world, mainly because we aren't covering enough people with well governed DB plans.

Yesterday,  I had a Zoom meeting with McGill Finance professor Sebastien Betermier and McGill Finance student Tania Kuoh, one of the MPIC organizers, and told them I've long argued we need to create a new pan-Canadian pension fund that amalgamates all corporate DB and DC pensions (no matter how well or poorly they're doing) to cover the retirement needs of many working Canadians that work in the private sector.

This new federal public pension fund should be based in Montreal (Toronto has enough already) and it will be modeled after CPP Investments and PSP Investments.

I've been saying this for years. The federal and provincial governments would force companies to give up control of their pensions and pass their pension plan risk onto this new entity which will have the backing of the federal government. 

Given the ultra-low rate environment is here to stay, most companies will gladly pass on this risk to a new federally backed pension pan.

Mr. Trudeau, are you listening? Or or do I have to get my younger brother who was your classmate at Collège Jean-de-Brébeuf to reach out to grab your attention? Great school, he went on to become a psychiatrist and you went on to become the Prime Minister of Canada and you both share some similar left-leaning liberal economic views.

I'm not coming at this issue from the Left, in fact, I'm coming at it from the Right of center and as I keep stating on this blog, good retirement policy translates into good long-term economic policy.

"But Leo, the big banks and insurance companies will fight this proposal tooth and nail."

Yeah, so what, screw them, they've enjoyed enough monopoly power over the last three decades and our retirement system hasn't gotten better.

I want all the key policymakers reading this blog to open their ears: it's time we start doing some "radical things" in Canada to bolster our retirement system for good and catapult it into the top spot. 

I say radical but this and other proposals I'm proposing aren't radical to me, only to those who have vested interests against improving our retirement system.

If it's one thing I want all of you to keep in mind, it's the following:

• Ultra-low interest rates are here to stay, the world is still in the grips of a long bout of deflation (never mind inflationistas, they're delusional).
• Unprecedented monetary and fiscal stimulus in response to COVID-19 was needed but it increased debt massively and only front-loaded future growth forward. It also exacerbated inequality to unprecedented and dangerous levels.
• What this means is future returns are necessarily going to be a lot lower than the last ten years, and along with ultra-low rates, this places immense pressure on global retirement systems.
• Both private and public pensions are going to go through a period of immense weakness and turbulence over the next decade.Millions of people will succumb to pension poverty, especially in countries with weak pension systems.
• Canada isn't one of them but there's a lot we can do to bolster our pension system and I'd begin by creating a new federal public pension which amalgamates corporate DB and DC plans (you force them to join, no exceptions). 

Those are my thoughts on this Election Tuesday where my buddies keep texting me: "Who do you think is going to win?"

So let me state this publicly, I think Biden will win but it's going to be very close and I hope the Senate remains Republican so we have some gridlock. 

Four more years of Trump? It's possible but I think the world can't handle it, too much volatility and acrimony.

Also, don't be surprised if there isn't a clear winner until Friday given that almost 100 million people already voted and many mailed in their ballots.  

Of course, more uncertainty is bad for the stock market which rallied sharply on Monday and Tuesday (I expect a big selloff is coming for the rest of the week).

Those are my thoughts on US elections. 

One last important thought. Whoever the next President of the United States is, they better address growing retirement angst there too and can learn a lot from Canada.

Below,Ivana Zanardo of HOOPP and Alex Mazer of Common Wealth hosted a webinar with panelists Elizabeth Mulholland of Prosper Canada, Eleanor Marshall of Bell Canada and Renée Légaré of The Ottawa Hospital to discuss the financial implications of COVID-19 for Canada’s workforce and how employers can support their employees, while also creating greater long-term business value for their organization.

Despite temporary measures put in place to support Canada’s workforce during COVID-19, many Canadians are facing a crisis of financial security. With so much uncertainty ahead of us, what can be done to improve the financial security of these workers? Listen to this great discussion, it's excellent.

Kuwait’s $124 billion pension fund racked up a record profit in the first half, continuing a turnaround for an institution previously marred by a corruption scandal.

The Public Institution for Social Security, which owns a quarter of U.S. private equity firm Stone Point Capital LLC, said profit rose 362% to $12.1 billion in the first half. It surged 611% to $4.7 billion in the second quarter, reflecting the “governance and strength” of its new investment strategy, according to a statement on Wednesday.

A new management team was brought into the fund in 2017 to transform the state-owned institution after its former head was found guilty of personally profiting from the organization over decades. The fund has since exited more than $20 billion in questionable deals in a major reorganization of its portfolio.

PIFSS, as the fund is known, said in August it aims to have 12% to 17% of its portfolio in real estate, followed by private equity at between 8% and 13% and infrastructure at 3% to 10%.

Between 40% and 60% of its portfolio is in stocks and fixed income. PIFSS also owns 25% of Oak Hill Advisors and 10% of TowerBrook Capital Partners LP.

Not much is known about Kuwait's Public Institution for Social Security. Back in August, Bloomberg reported that the massive pension fund had cash to spend after the overhaul: 

Well, I'm glad Kuwait's Public Institution for Social Security (PIFSS) got rid of its former head, cleaned up shop, bolster whistleblower  policies and is focused on investments and delivering on its mandate.

Mr. Nisf is right, PIFSS is a pension fund and as such it has a different mandate than the giant Kuwait Investment Authority (KIA), the fourth-largest sovereign wealth fund which is very well known among institutional investors.

Sovereign wealth funds are similar to large global pensions except their mandate isn't to cover future pension liabilities, they literally make investments to bolster the public finances of the states they represent.

Now, as far as PIFSS's record first-half profits, I can only speculate it significantly cut its cash holdings further to bring it closer to 4% and bought more public and private equities at the right time.

When I read that at one point the Fund had 41% of cash to invest, I almost fell off my chair. 

Mr. Nisf was right to call this "catastrophic"as  no pension fund in the world holds more than 5% cash at any given time. These are long-term investors that need to be fully invested (or close to it) at all times.

Unfortunately, I went to PIFSS's website and cannot read Arabic so I cannot share more. I hope they add and English version similar to the Kuwait Investment Authority.

What do I think of PIFSS working with Cambridge Associates and Mercer? That is fine, they are well-known consulting shops but I think they need to gain more exposure and start doing more club deals with Canada's large pensions.

All in good time, I was happy to learn about Kuwait's large pension fund.

Kuwait itself is undergoing a leadership change.

Last month, Sinem Cengiz, a Turkish political analyst who specializes in Turkey's relations with the Middle East, wrote an interesting article for Arab News on how Kuwait is starting a new era after smooth leadership transition:

There is a famous saying when it comes to Kuwait that indicates how leadership is an integral part of the country. It states: “Kuwait is Al-Sabah, and Al-Sabah is Kuwait.” In the past few days, all eyes were fixed on the oil-rich state following the death of its 91-year-old emir last week.

As expected, the country enjoyed a very smooth succession process, in which the new emir and crown prince took office one after the other. Kuwait’s new crown prince, Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah, took his oath of office before parliament on Thursday after being nominated by his half-brother, the new emir, Sheikh Nawaf Al-Ahmad Al-Sabah. The octogenarian crown prince was unanimously approved by the country’s National Assembly.

Not all members of the Al-Sabah family are closely involved in politics. Many have opted for careers in business, in government administration or in academic professions. Sheikh Meshal, with past experience in the Interior Ministry, has been the deputy chief of the Kuwait National Guard since 2004, largely staying out of the political scene.

One of the things being praised about the new crown prince is that, unlike other top candidates for this position, he has a clean profile in the country’s tumultuous politics, despite his career in the Interior Ministry. Sheikh Meshal, who accompanied the late emir to the US for the latter’s medical treatment, is also known for being very close with the new ruler. His appointment, rather than the selection of a next-generation candidate, has been interpreted by analysts as a “conservative choice” that provides much-needed continuity and stability. Thus, the selection of Sheikh Meshal, the fourth sibling to ascend from the same branch of the royal family, delays any generational change in Kuwait, for a decade at least.

Sheikh Nawaf nominated his successor as crown prince in a very short period of time — just eight days — breaking the record for the quickest nomination despite having a year to make his choice. Previous rulers took at least 20 days. This was not only due to the fact that Sheikh Meshal was the strongest candidate for the post, but also the fact that only a few weeks remain until parliamentary elections are due to take place. Sheikh Nawaf prolonged the term of the outgoing parliament until Oct. 20 to ensure it could approve the crown prince. Given the economic problems the country faces due to the coronavirus disease (COVID-19) pandemic and falling oil prices, the next parliament is likely to have more opposition members. 

The most important aspect of the previous elections, held in November 2016, was that the opposition made a strong comeback after an absence of more than three years, winning almost half of the seats in the 50-member parliament. The upcoming elections are expected to further strengthen the position of the opposition, although it is hard to say that Kuwait has a unified opposition. Its parliament is often an amalgam of several figures with diverse demands and motivations.

However, Kuwait’s parliament takes a unified stance when it comes to the country’s foreign policy. Therefore, much of the parliamentary dispute is related to domestic issues. The issues that will be on the new parliament’s agenda will range from the budget deficit to rising prices, from youth unemployment to austerity measures, from oil prices to public sector jobs, and, most importantly, the issues related to COVID-19.

Thus, the succession took place while the country faces some key issues. Sheikh Nawaf and Sheikh Meshal, both brothers of the late ruler, are expected to focus on domestic issues. Both have witnessed all the stages of Kuwaiti politics since the country’s independence in 1961. Given their years of service in the state apparatus, it is likely that the country will continue on the same foreign policy path, but it might go through significant changes in terms of domestic politics. Kuwait, with its solid institutions, has been through several critical phases in its history, while learning lessons from most of these phases. 

Sheikh Meshal, in his televised remarks, said Kuwait will uphold its regional and international commitments and “its path of peace and democratic approach.” Thus, it will be significant to see the new leadership’s policies and the outcome of the upcoming parliamentary elections, since these developments are likely to shape Kuwaiti politics for years to come. 

I wish Sheikh Nawaf and Sheikh Meshal the best of luck as they lead this oil rich kingdom into its next phase but I do hope they maintain governance and do not interfere in Kuwait's pension fund in any significant way except to ensure it remains in good hands and maintains its focus on its members' best interests.

Below, Meshal Alothman, director general at the Public Institution for Social Security, discusses his investment strategy for the fund and his asset allocation. He speaks on “Bloomberg Daybreak: Middle East.” (August 20202).

Mr. Alothman sounds like a very sharp pension fund manager. I invite him to read our series on integrated Total Fund Management (Part 1, Part 2 and Part 3 are already available and Part 4 will be published here tomorrow.

Lastly, earlier today, CNBC's "Halftime Report" team discussed their investment strategies amid election uncertainty as results continue to trickle in.

In Episode 3 last week, we introduced the series roadmap, which helps navigate through the wealth of topics already discussed in almost 300 pages and three hours of presentation material.

The roadmap is organized based on the notion of organizational and investment beliefs about TFM (or why we need TFM), determining what strategies and objectives to pursue to fulfill the beliefs.

As part of the roadmap, we organized all the various insights, conclusions and concerns expressed so far in the series’ episodes in a set of clearly articulated beliefs and corresponding strategies and objectives to pursue.

A central part of the TFM strategy and objective discussion is the investment belief about the path-dependent nature of the pension outcomes. To this end, we encourage those who are new to the series to revisit specifically the conclusions of Episode 2 of "what nobody told you about long-term investing" and the fact that in the presence of liabilities, the long term is a series of short terms. As such, this belief about the path-dependent nature of the pension outcomes requires an investment strategy that explicitly considers the management of the path of the current short- and medium-term achievable returns toward the long-term required returns.

Such an investment strategy needs to be part of a rethought/ renewed approach to asset allocation where it is about outcomes, or what we called an outcome-oriented policy portfolio. This outcome-oriented policy portfolio comprises key pension plan outcomes (level of wealth, inflation protection, contribution rate risk, and liquidity to pay pensions at all times), rather than specific asset classes. The asset classes are only a means to an end (outcomes). What the portfolio holds at any given time maximizes the probability of achieving or maintaining these outcomes with acceptable variations and could change at any point in time given economic and market conditions or other external or internal requirements.

The question then is what the investment objective of such path-dependent, outcome-oriented portfolio management would be. This is similar to the equivalent notion of the portfolio optimization principle introduced by Harry Markovitz. The objective function is to maximize returns at a given level of risk or minimize risk at a required level of returns, or the efficient frontier. But what is the equivalent of the Markovitz efficient frontier when it comes to a path-dependent allocation process? This was the primary focus of Episode 3, which illustrated how to think of this problem by borrowing examples and experiments from physics and computer programming.

To this end, Episode 3 concluded that it is not about long or short-term investing, but it is about how "fast" or "slow" and "safe" when arrives at the final destination (end outcome). We illustrated this with two experiments from physics. Another example was the "daily commute dilemma" where distance (or put in different words, the short- or long-term investing), in a situation of congested traffic does not matter ("congested traffic" being the notion of low or high expected returns). What matters is that one arrives on time and safe at the final destination, even if they took the long road.

We demonstrated that safety is essential because today's pension plans are more sensitive to adverse outcomes than ever. This sensitivity today has doubled since the late 90s. The optimal objective of TFM is also about what decisions one can make about the portfolio today, given what we know with a certain probability about the future and the required outcomes in conjunction with the path-dependent allocation and managing the current achievable returns versus the long term required returns. We illustrated this concept based on the saying that "all roads lead to Rome," but with the "axiom" augmented by the TFM postulate, which road one takes matters.

We also introduce the critical notion of the term structure of expected returns as central to making TFM path-dependent asset allocation decisions.

Isn't TFM just a Tactical Asset Allocation ("TAA") in disguise?

At this point, many of you are probably asking the question, what is the difference between TFM and the typical allocation approaches? Isn't this just a TAA in disguise? And how does it compare to Strategic Asset Allocation ("SAA"), for example, or other "Just be diversified" or "All-Weather" approaches?

Episode 4 provides a highly visual comparison of the difference in these approaches. The comparison is based on the time horizon and the role of the sub-periods for decision-making. Other aspects are how each approach considers the end objective (outcome) and whether the approach incorporates any notion of expected returns and, further, any path-dependence on these returns.

The summary takeaways are presented in the slide below.

The next slides further illustrate graphically some of the points mentioned in summary above related to the decisions at each point of the horizon, the explicit or implicit use of expected returns and how decisions are made throughout the investment horizon.

Some essential observations were also made concerning the SAA and the "Just be diversified," or "All-Weather" approaches. In SAA's case, we can make the statement that we will be holding this asset mix today because we expect these average expected returns over the entire time horizon. There is an explicit expectation of constant average expected returns throughout the investment horizon (a "flat" term structure of expected returns).

A few insider insights on SAA

The conclusion above might bring some disagreement from practitioners. To be fair, typically, the SAA expected returns have a built-in path, which is often valuation-based, for equities and currencies, or path of interest rates embedded in the expected returns. I have witnessed quite a few of these at the various places I have been, so let me tell you some insider insights on this process and why it is essential to talk about it in the context of how different it is from TFM.

Even if there are built-in paths of returns, many of these differences are smoothed out at the end not to create any significant impact on the plan design. Just imagine this, if tomorrow the fund comes up with a zero or, even worse, negative long-term expected returns on equities, what do you think would be the impact on the plan design?

In this case, actuarial techniques and considerations will be used, and these will be either inflation assumptions or some margins for adverse deviation or any other decisions, and this is a significant governance point.

Today, even if one has 100 percent confidence in a zero or negative expected return for equities, these expected returns will directly impact the plan design. This is very difficult to accept by the plan sponsors or the beneficiaries, and the effect is "managed" via actuarial techniques and assumptions. Thus, the investment perspective is overwhelmed by the plan design perspective and possibly disregarded. At this point, it all hinges on the hope and belief for a mean reversion within a reasonable time frame so that the actuarial techniques would work. If there is no mean reversion or a slow bleed, the unpleasant truth shows up and can no longer be smoothed.

Sometimes, the decision of which asset classes to include in the policy portfolio and how much comes from the bottom-up. Usually, some head of an asset class wants to initiate a new strategy or an asset class, often because there is the ability to add value. This now gets into the question of compensation and benchmarks. But let us leave this for some other time. It could also be an area that the asset class wants to explore, or it is about internal politics, centers of gravity and relevance.

This might be a perfectly reasonable argument but it does not mean that the fact that an asset class can add a relative value over the benchmark (what we called local optimality earlier in Episode 1) on a standalone basis is necessarily good for the fund (we called global optimality). It could be that although there is a distinctive case for adding relative value at the class level, however, the asset class may perform worse on an absolute basis or relative to other possible asset classes and strategies.

Also, sometimes, clients need to approve a new product or an asset class. The easiest way for this is to become a new asset class in the policy portfolio. More often than not, the bottom-up process wins, and SAA would need to find a way to incorporate the desired strategy in the asset mix to satisfy the intent. "Finding a way" may include creative correlations, volatility or expected return assumptions, which will bring out the benefits of this addition to the asset mix.

In this example, the investment perspective is overwhelmed by the bottom-up perspective.

Both these examples of the investment perspective being overwhelmed by the plan design perspective, or the bottom-up perspective, could be viewed as examples of the hidden costs we discussed in Episode 1, which ultimately lead to diminishing economies of scale.

There is a more elegant and flexible way to keep the outcomes constant (wealth, inflation, contribution risk and liquidity) via an outcome-oriented policy portfolio and adjust the actual asset mix in a way; it would make sense solely from an investment perspective. It would be a transparent, built-for-purpose, and accountable process with clear costs and benefits.

We spent quite a bit of time on SAA, but it is essential to understand how things work in real life and the constraints of this approach.

No view on expected returns is a view nonetheless

In the "Just be diversified/All-Weather" approach, there are no explicit returns, so there is no term structure.

Now, let us look at the second case, the "Just be diversified" type of allocation approach. In this approach, there are no explicit expected returns. This portfolio management approach is based on the belief that it is best to be diversified if one does not know anything about the future. This still implies that one knows something about the future. Actually, two things. It implies that one knows the future correlations of assets, and one also knows the future magnitude of the changes in assets' value. And the belief that there will always be a mean reversion to a known in an advance mean.

However, correlations are not given. They are an artifact of evolving economic conditions and the headwinds and tailwinds of other technological, environmental and socioeconomic drivers. This is why themes are significant in the portfolio construction context, not only in an investment context, given the extraordinary world of disruption, both technological, societal, environmental, regulatory, you name it, it will be even harder to know what these correlations will be. It would be much harder to assume any stable asset relationships. The same goes for the magnitude. A disruption could swing the fortunes of businesses, sectors or economies overnight with a significant magnitude.

As for the mean reversion, in a disruptive future, mean reversion might be even less likely. Structural changes might take place even if temporary. But who knows for how long temporary is? Look at globalization, travel, office, and many others. Things might get back to the mean, but who knows how long this will take, or the equilibrium mean might change at a different level. Also, the very definition of what the mean is might change as well.

TAA is a single period decision, from today to tomorrow, and there is no direct consideration for the end objective. TAA considers the single best outcome, not the sequence of outcomes across all the periods. You might ask: if we always choose the best single period, will this lead to the best outcome? As we will see in the upcoming Episode 5 with the case studies, using every single period's best path does not lead to the most optimal decision today.

As opposed to the other approaches, TFM makes the most optimal decision today based on a multi-period basis, the complete term structure of expected returns. TFM is a multi-period decision because we can have different expectations about the absolute and the relative expected returns in each subsequent period of the entire investment horizon. This is both different from SAA, where we have constant, absolute and relative expected returns throughout the horizon and different from TAA, where we have only one single period. Thus, TFM is saying that we will hold this asset mix today because we expect these expected returns over the full horizon with a certain probability. Or this is another definition of the path of returns.

We have an (ever-changing) term structure of expected returns at each period in the investment horizon. We are discounting the expected returns at different points in the term structure for each period decision using a path-dependent function (recall the physics and the Rome experiments in Episode 3). Discounting the term structure of expected returns with the path-dependent function allows us to determine the best portfolio we can hold today, maximizing the end objective.

In summary, TFM is distinctly different from other asset allocation approaches. For TFM, decisions are made each period (continuous assessment) on a multi-period ahead basis (the complete term structure of ERs) for an optimal end objective. It manages outcomes (an outcome-oriented policy portfolio). It does not compromise the investment objective for plan-design or other objectives. As such, it avoids the hidden cost of suboptimal allocations.

TFM framework and process

Discussing the difference in the allocation approaches and the role of the term structure of expected returns clears the way to introduce TFM implementation in its first two elements - the framework and the process.

Remember, we started Episode 1 with a slide illustrating that there is no textbook and no blueprint of how to do TFM. If we went through 300 pages and three hours of presenting the foundation of Total Fund Management, it is time to talk about implementation. So, let us close the textbook and look at the blueprints or develop a total portfolio management framework and process. Based on everything we discussed so far, we can define four key objectives of the Total Fund Management investment process and the corresponding strategies to accomplish these objectives. All boils down to the ability to manage "the winding road."

The first element is path-dependent allocation. And to do this, one needs a process that is similar to strategic tilting, or you can find other ways of naming this. The second element is efficient portfolio maintenance or balancing the cost of maintaining the portfolio with the risk of this portfolio deviating from its original version and the return which could be gained or sacrificed by doing so. A proper portfolio rebalancing represents this as a strategy to implement efficient portfolio maintenance. The next two elements are related, and they are the ability to manage downside risk and liquidity and contingency management. The strategy to accomplish this objective is some form of risk mitigation portfolio protocol.

Let us now zoom out and outline some key aspects of the three strategies we just identified to accomplish the four initial objectives.

The first one is portfolio rebalancing, and portfolio rebalancing is most efficient as portfolio maintenance in normal market conditions. However, portfolio rebalancing is suboptimal when there is a pronounced trend, whether a market downturn or a bull market.

In a market downturn, what becomes essential is managing everything related to the balance sheet, leverage, liquidity and ultimately, contingency. And this needs to be done within a structured risk mitigation portfolio protocol, which includes monitoring and dynamic downside protection, the ability to have critical stress signals and planned crisis asset allocation and liquid contingency. On the flip side, in strong market conditions, what one needs is a strategic tilting or any form of a cycle and valuation type of allocation. And what is also important is to optimize the leverage and the balance sheet in these conditions.

To do all this, one needs a structured process that integrates market liquidity and economic conditions with valuations to arrive with expected returns and risk conditions and the short- and medium-term horizon. We will look at this process next.

The TFM process

This is the core of the total portfolio process.

It starts with portfolio exposures. The second element is the ability to have a macro and market valuation framework. The third one is the portfolio diagnostic. And the fourth one is when it all comes to making investment decisions.

Nothing could be accomplished without portfolio exposures. As simple as it may sound, a key aspect is timely and accurate reporting on critical attributes with country regions, sector duration, credit and so on. Style and factor exposures are also valuable, but a strong foundation for basic but timely and accurate key exposure reporting is needed first. Probably less in the past, but thematic exposures are becoming increasingly crucial for TFM given the disruptive nature of the world today, as they may be a headwind or a tailwind to the conclusions from a broader macro market assessment.

The second element of the investment process is the most critical one because it allows you to link assets to markets and develop absolute and relative expected returns for these assets at different horizons, which is then the basis for the term structure of expected returns.

And at different horizons, asset returns are driven by different forces. Short-term returns are heavily driven by economic and market indicators related to liquidity and sentiment. And the short- to medium-term returns are driven primarily by business, credit and monetary cycle conditions, including tailwind from valuations. The medium-term horizon for three to five years, returns are primarily driven by valuation. And finally, at the 10+-year horizon, the expected returns are driven by a combination of deviation from long-term equilibria, with some tailwind from the valuation.

There is an additional aspect of the expected returns that needs to be considered, and these will be the themes because, as mentioned earlier, themes could act as a headwind or a tailwind to the macro or the market signals. And they may impact different horizons as well, so you can have multi-cycle themes, which are kind of mega supercycle trends that play on structural drivers of change. Then, there might be cyclical themes that typically dominate the returns and are seldom repeated in consecutive cycles. And then you can have within-cycle themes, typically early, late- or mid-cycle plays and impacts.

And these could sometimes have a significant impact on the final expected return. So, although the market and the macro conclusions might be suggesting a certain expected return, the impact of a theme could amplify or negate the impact.

The reason for this is that a properly designed macro and market framework would allow you to develop the term structure of expected returns and as we saw the term structure of expected returns, it is an essential requirement for a path-dependent total portfolio allocation process. And besides, if the macro and market framework is appropriately designed, the conclusions about the assets themselves would effectively allow you to develop several risk matrices, which describe the market and economic conditions. And these risk matrices are complementary to the expected returns, and they provide a more aggregate view of the state of the market and what drives this state.

The third element of the investment process is portfolio diagnostic. This is the ability to evaluate the current portfolio versus the expected returns and the risk matrices derived from the macro market framework. So, visually, once you know what your exposures are in the portfolio, you know the market conditions and what it means for the expected returns. Then the product of all this is the ability to diagnose the portfolio. And this now leads to the ability to make decisions.

There are several requirements for an efficient decision-making process. The presentation goes into detail on these, but the necessary conclusion is that there is a need for a structured and disciplined process at the investment committee. The reason for this is that in many cases, you can observe investment committees, even at some of the large funds, for that matter, that does not necessarily have such a structure and discipline process.

And by virtue of this, a lot of decisions are ad-hoc decisions. Ad-hoc decisions are typically made only in a stressed market condition, so when it is about, figuratively speaking, it is about the return of capital rather than the return on capital. So, it is about preserving capital rather than any return on this capital. And this is a problem because this means that a lot of the potential efficiency embedded in the TFM process will not be necessarily realized. And therefore, it becomes, again, one of these hidden costs that weigh in on the efficiency and the effectiveness of the Canadian Pension Model. The fact that there is no well-structured and disciplined process at the investment committee is an implicit, hidden cost to the fund's efficiency. This is why there is a need for an investment process.

Now, sure, an investment process is needed. But it has to be structured and disciplined and most probably data-driven as well, rather than just a discretionary one. And the reason for this is that there is, as everybody knows, there is an information overload. There are too much data and too much noise as well. And it is not easy to know where to focus the energy and time. Also, having a proper process, both structured the disciplined and data-driven, safeguards against cognitive biases, so subconsciously making selective use of data or even feeling pressured to decide by more powerful or more knowledgeable peers at the investment committee.

And ultimately, it is also about accountability and the ability to follow and the ability to look back and look at good decisions and bad decisions and create this evolutionary process of learning from mistakes and certainly probably making new mistakes.

Let us zoom back in on how the macro and market framework we described earlier supports specific investment portfolio decisions at the Total Fund, as illustrated in the next slide.

So, for the first time in the series, we can articulate and visualize the TFM integrated investment process. So, this investment process at its core has the four elements of the decision-making so, exposures, macro and market framework, portfolio diagnostic and decision making, all the elements that we discussed so far. This is the core of the process, but many satellite TF investment processes are linked and draw conclusions from the core investment process. And these processes have mentioned them a couple of times already throughout the series, but here is the first time we put them all on one page in an integrated manner. These are the rebalancing decision, risk mitigation, anything related to strategic tilting or any path-dependent allocation, currency hedging, active risk, balance sheet, leverage, and liquidity.

And what is essential is that all these decisions are made in an integrated fashion.

So not just making the rebalancing decision and undoing it through some currency hedging decision or some liquidity decision. Or deciding on the risk mitigation decision, but then offsetting it by some other decision. And it is also a consideration of the cost/benefit of doing one or the other. So, for example, if the decision is to hedge because of exposures, what is going on in the markets, the portfolio diagnostic, the decision is to look at, let us say, equity risk.

The decision needs to be carefully weighed whether this is done through a risk mitigation mechanism, be it, let's say, some form of portfolio insurance, or this could be done through the rebalancing just by increasing the cash allocation, which in certain cases could be an equivalent could be seen as an equivalent option position, or this could be done through the cross-hedging properties of currencies. Again, which way it is implemented is also a question of the impact of the decision or the magnitude of the impact, but also what is the cost of this decision?

Because it might be, you know, a hundred percent impact through the portfolio insurance mechanism, but it is very costly, or it could be an 80 percent impact through rebalancing. Still, it is very cheap as a direct cost, but there is a hidden opportunity cost. And the same for currency hedging, so it is the ability not only to be able to articulate these decisions but also weighed the cost-benefit of these decisions.

And this is what a CIO needs to be able to implement a TFM process. And again, this TFM process is not because it is nice to have. It is all about bringing these second-order efficiencies to the fund to extend the economies of scale rather than just having TFM as a self-centered process on its own. It is a good time now to pause. And zoom out and visualize in a slightly different way the roadmap that we discussed in detail in the previous episode and visualize it through the steps we need to take to move from the investment beliefs to the actual implementation.

In closing, these are the key takeaways from today's episode, how to develop a Total Fund framework and process.

• TFM is very different from SAA, and any all-weather or diversification approach or TAA. 
• TFM critically relies on the ability to formulate expected returns at different time horizons or this term structure of expected returns. The path-dependence is the distinct feature that separates it from all the other approaches and allows it to function. 
• At its core, the TFM process can formulate absolute relative expected returns at different time horizons as part of a consistent and coherent macro and market framework. 
• The evaluation of the TFM exposures given the expected returns and the market conditions, or what we called risk matrices, allow for making critical Total Fund decisions. Total Fund decision making, however, requires a structured and disciplined, data-driven process. 

This concludes Episode 4 for today. Episode 5 next Thursday will provide several case studies to illustrate key TFM applications and decision processes.

Let me begin by thanking Mihail Garchev for another great comment on integrated Total Fund Management.

If you have not done so yet, please review all three previous parts of this series:

• Introduction to Integrated Total Fund Management: Part 1
• Total Fund Management Part 2: What Nobody Told You About Long-Term Investing 
• Total Fund Management Part 3: When All Roads Lead to Rome

I highly recommend you take the time to read our previous comments and watch the previous episodes in order to get the right foundations.

Once again, the material covered here isn't available in textbooks, consultants don't cover it properly or at all, it can only be produced by someone like Mihail who not only has extensive experience and knowledge, he's also an excellent teacher and it comes across in the clip below.

This week, Mihail had oral surgery and was pretty much out of commission on Monday, so I thank him for taking the time to work on this episode and hope you enjoy it. 

Since Mihail sent me his synopsis a bit later today given he is still recovering, I will keep my comments brief.

Today's episode discusses implementation but Mihail begins with a great discussion on the difference between strategic asset allocation, the all-weather/ diversified approach, tactical asset allocation and total fund management.

Importantly, TFM critically relies on the ability to formulate expected returns at different time horizons and the path-dependence is the distinct feature that separates it from all the other approaches and allows it to function. 

As he states: "At its core, the TFM process can formulate absolute relative expected returns at different time horizons as part of a consistent and coherent macro and market framework."

On implementation, he raises a lot of critical issues and states Total Fund decision making requires a structured and disciplined, data-driven process. 

I won't provide too much feedback today as I received this comment in the late afternoon but let me give you some good food for thought on why implementing proper Total Fund Management is so critical nowadays.

Earlier today, a friend of mine sent this very long but interested article posted on Seeking Alpha, Money-Printing : 2020 vs 2008. 

Without getting to much into it, I replied to my friend:

First of all, she borrowed heavily from my ideas on deflation coming to the US which I wrote back in 2017.

Alright, no problem, she then goes into a long and somewhat technical comment to come to the same point I've been making, namely, the Fed and other central banks are desperately trying to ward off deflation but their policies are only making things worse.

The Fed has succeeded in creating a) Asset Inflation and b) Housing inflation but it cannot control overall inflation which comes from sustained wage gains.

Asset inflation primarily benefits ultra wealthy people which own all the assets but it exacerbates wealth inequality and is ultimately deflationary.

Housing inflation always leads to mania which end very badly with ripple effects in credit markets. So that too is ultimately deflationary.

The central theme I keep harping on for pensions is that deflation is still headed our way.

This means we have not seen the secular lows on long-term bond yields and we need to prepare for a long period of ultra-low rates, possibly negative rates, and with that much lower returns going forward but with a lot more volatility.

I'll talk about this week's market melt-up tomorrow but a week doesn't make a decade and long-term investors know this very well.

There are important structural issues going on out there and those who understand these themes very well recognize why adopting and implementing a Total Fund Management approach is critical at this time.

Basically, anything you can do to add value over a multiple time frames using all the tools at your disposal is critical and can make significant contributions to your pension plans over the long run.

Anyway, I don't want to confuse anyone, please take the time to watch Episode 4 and jot down notes as I did because there is a lot covered here.

Below, Episode 4 of the seven-episode series "Introduction to Integrated Total Fund Management" presented to you by Mihail Garchev, former VP and Head of Total Fund Management of BCI.

Once again, I thank Mihail for another great episode, hope he recovers swiftly from his oral surgery.

Stocks closed mostly flat on Friday as traders looked for clarity around the presidential and congressional election results. Sentiment was kept in check by better-than-expected U.S. unemployment data.

The S&P 500 ended the session down less than 1 point at 3,509.44. The Nasdaq Composite rose less than 0.1% to 11,895.23. The Dow Jones Industrial dipped 66.78 points, or 0.2%, to end the day at 28,323.40.

Energy and financials were the worst-performing sectors in the S&P 500, falling 2.1% and 0.8%, respectively. UnitedHealth led the Dow lower with a decline of nearly 2%.

Democratic nominee Joe Biden leads with 253 electoral votes, according to NBC News projections, while President Donald Trump has 214. Votes are still being counted in several key states including Nevada, Arizona, Pennsylvania and Georgia. According to NBC News, Biden has a slight lead in Georgia and Pennsylvania.

Despite the uncertainty around the presidential vote, Wall Street notched its best weekly performance since April. The S&P 500 and Nasdaq jumped 7.3% and 9%, respectively, for the week. The Dow rose 6.9% this week. The S&P 500 also posted its biggest election week gain since 1932. 

Victories by Republicans in several key Senate races, thus lowering the odds of a “blue wave” and the potential for higher taxes and stronger regulations, have been cited by Wall Street strategists as a reason for the rally in tech stocks. However, Republicans have not yet won the necessary seats to control the Senate, according to NBC News projections, with two potential run-off elections in Georgia.

“The market is just getting more comfortable with the outcome of a divided government, where we see a continuation of political gridlock [and] no meaningful changes on tax policy,” said Dan Eye, head of asset allocation and equity research at Fort Pitt Capital Group.

To be sure, a divided government could make it harder for lawmakers to push through new fiscal stimulus. The Washington Post also reported, citing sources, that the White House wasn’t expected to propose a new aid package. Instead, Senate Majority Leader Mitch McConnell is expected to push through a “skinny” aid package, which has been dead on arrival with House Democrats, according to the report.

Alicia Levine, chief strategist at BNY Mellon Investment Management, said that the possibility of Democrats winning narrow control of the Senate was one of the major risks not priced into the market even if the runoffs wouldn’t necessarily cause the markets to dip.

“The market is now pricing in a Biden presidency with a Republican Senate, and the rotation that we saw was based on that,” Levine said. “And if there’s an increasing risk that that’s not the case for the Senate, then this entire move could also be somewhat at risk as well.”

Levine also said that the strength of tech stocks earlier this week was due in part to their strong earnings performance and resiliency in the case of new economic restrictions in the United States during the winter to slow the spread of the coronavirus.

Republicans have filed a flurry of legal challenges in several states related to the ongoing vote counts, and the Trump campaign said it will request a recount in Wisconsin.

In an announcement from the White House on Thursday night, Trump falsely claimed victory in several states and made accusations of voter fraud without evidence, saying “there’s a tremendous amount of litigation generally because of how unfair this process was.”

The Biden campaign, meanwhile, has called for all votes to be counted.

“Democracy’s sometimes messy. It sometimes requires a little patience as well,” the former vice president in a short speech in Delaware on Thursday, adding that he was confident his ticket would be declared the winner once all the votes are counted.

Strong jobs report

The Labor Department said the U.S. unemployment rate fell to 6.9% in October from 7.9%. Economists polled by Dow Jones expected the rate to dip to 7.7%. The U.S. economy also added 638,000 jobs last month, topping an estimate of 530,000.

“The latest jobs report shows the U.S. economy is rebounding quickly from COVID-related shutdowns in the spring with the unemployment already dropping below 7%,” said Tony Bedikian, Head of Global Markets at Citizens.

“Despite strong signals that many Americans are getting back to work, however, the number of coronavirus cases is rising and that may mean new restrictions on daily life that could further accelerate a shift to a more digital economy and increase calls for additional government stimulus,” Bedikian added.

It's Friday, there is a lot to cover this week, so let me get right to it.

First, my thoughts on the election results:

• As I predicted, it was a lot closer than the polls were leading people to believe because a lot more people voted for Trump than pollsters predicted. There was no "blue wave" or "red wave", the United States remains more divided than ever when it comes to political allegiances.  
• Vice President Joe Biden is clearly in the lead and I believe once all votes are accounted for, he will be declared the next President of the United States. Still, if he wins, he needs to unite the country and that means he will have to govern from the center and reach out to his Republican counterparts.
• The big surprise in these elections was Republicans in the Senate and the House drastically over-performed doom-and-gloom predictions of their demise amid a Trump landslide loss. If Biden winds up winning, At this writing, Republicans may be on track to pick up between five and ten seats in the House and they could be well-positioned to make a serious run at the majority in the House in the 2022 midterms.
• All this to day, it's the Democrats, not the Republicans, who need to do a lot of soul searching after these elections are done.
• What about Trump? He won't concede defeat but he's done for now. However, he’ll be back for more in four years,stronger than ever.

Keep in mind, votes are still being tabulated, there are still a lot of contested races too close to call so a lot of things can change this weekend.  

 

For example, on Friday, Democrat Mark Kelly beat Republican Sen. Martha McSally in Arizona, flipping the second seat of the 2020 election for Democrats.

 

While the political landscape remains uncertain, a green wave swept over markets this week as investors cheered "a decided government" which signaled three things: 

1. No hefty tax increases ahead, not on individuals or corporations and not on capital gains.
2. No increase in regulations, it will be a lot tougher in a divided government.
3. No more tariffs as the US engages with the world and re-embraces globalization.

The was the common refrain you heard over and over this week from top Wall Street strategists, including JPMorgan’s top-rated equity strategist Marko Kolanovic who believes the election outcomes are shaping up to be “the best of both worlds for stocks,” calling for a sustainable rally for the market:

Kolanovic, the bank’s head of macro quantitative and derivatives strategy, said a possible Joe Biden presidency with a split Congress could result in a market-friendly environment with lower taxes, status-quo regulations and a better U.S.-China trade relationship. He called this outcome “one of the most favorable scenarios for the market.”

“A GOP senate majority should ensure that Trump’s pro-business policies stay intact (tax code, deregulation), and if Biden is confirmed we should be able to expect an easing of the trade war (which should boost global trade and corporate earnings growth),” Kolanovic said in a note to clients on Friday.

But the ferocity of the melt-up in stocks this week was a bit peculiar, especially coming off a bad October and last week where people were warning the tech bubble is imploding and another stock market crash is looming. 

Christopher Cole, volatility trader and tail risk manager, tweeted this on Thursday:

"The stock market is a derivative of the options market. The market action the last two days has little to do with who won the Presidency, Senate, or expected policy or stimulus actions. It has everything to do with dealer hedging of short-dated options flows (gamma, vanna, charm)."

The stock market is a derivative of the options market

The market action the last two days has little to do with who won the Presidency, Senate, or expected policy or stimulus actions

It has everything to do with dealer hedging of short-dated options flows (gamma, vanna, charm)

— Christopher Cole (@vol_christopher) November 5, 2020

Now, you can argue they were buying puts and calls going into elections but whenever you see the market melt up 7% during a week of a major political event, you know there were many institutions last week buying a ton of short-term call options on large mega cap tech shares, similar to what the Nasdaq whale did two months ago.

Dealers were caught off guard and they had to delta hedge their books, meaning buy more underlying stock as these call options came into the money, exacerbating the surge in some key stocks like Apple, Microsoft, Amazon, Facebook and plenty of others.

Welcome to Jay Powell's Wall Street, that liquidity orgy I talked about in June is alive and well, speculators are gorging on momentum stocks whenever volatility rises, trading like crazy in an environment where risk-taking is not only encouraged, it's dominating markets.

Now, to be clear, the Fed wants everyone to take more risks, including pensions, because the Fed and other central banks are still fighting the deflation demon lurking out there, so it welcomes asset inflation, housing inflation and nay inflation it can get at this point.

The problem is the Fed and other central banks are fighting a losing battle, they can create asset inflation and housing inflation but have no influence on overall inflation which comes from sustained wage gains.

Worse still, their policies are distorting markets and exacerbating rising inequality, which only ensure more deflation down the road. 

This is why I believe we are in for a long, tough slug ahead where rates on long bond yields are heading lower and all risk assets will remain very volatile.

People trading these markets are not seeing the endgame here but one very big macro fund which is down big this year may ultimately prove to be right in its bearish calls:

Bridgewater Loss Stuck at 18.6% in Main Fund After Model Tweaks https://t.co/uoSiSKj6Ij via @Yahoo

— Leo Kolivakis (@PensionPulse) November 6, 2020

All I know is COVID-19 is still ravaging Europe and the United States, this morning's job numbers were better than expected but long-term unemployment is ballooning, Republicans and Democrats are still squabbling over the size of the stimulus package and we're going into a winter of discontent:

COVID-19 cases are surging in Europe, while the media claims the disease is mainly a US-only problem. pic.twitter.com/bgBst6DHlG

— Dr. David Samadi, MD (@drdavidsamadi) November 2, 2020

English COVID infections stabilise at 50,000 per day - ONS estimate https://t.co/uPq9pgkvRnpic.twitter.com/EO5R6QsPic

— Reuters (@Reuters) November 6, 2020

U.S. records over 121,000 COVID-19 cases, setting record for new daily cases https://t.co/eVlil5GQ8A

— CBS News (@CBSNews) November 6, 2020

Unemployment is falling. Long-term unemployment is ballooning https://t.co/9PrRRNCJzc

— Leo Kolivakis (@PensionPulse) November 6, 2020

Coronavirus stimulus update: McConnell and Pelosi push for relief bill https://t.co/ZEorNQCVNS

— Leo Kolivakis (@PensionPulse) November 6, 2020

"We're going into what could be a winter of discontent. It's not going to matter what the data looks like going into winter. It's not going to matter how much more stimulus the Congress puts in. It's all about Covid:" MS's Ellen Zentner https://t.co/JQ0kgg9nQz

— Lisa Abramowicz (@lisaabramowicz1) November 6, 2020

I know, it's all good, as long as Jay Powell and other central bankers keep pressing hard on the gas, but if you really think about it, this market is at risk of overheating and exhausting itself. 

No doubt, it was a great week for speculators, but beware of the over-exuberance in this market and be cognizant of downside risks, they're actually mounting, not falling. 

Anyway, here are the top-performing S&P sectors this week:

Not surprisingly, Tech (XLK) led the way as FAANG stocks and cloud stocks (CLOU) surged this week followed by Health Care (XLV) which had a great performance on the back of big pharma, health insurers and big and small biotech companies (IBB and XBI) which surged as the RISK ON trade dominated this week.

Energy (XLE), Utilities (XLU), Real Estate (XLRE), and Financials (XLF) all posted gains but underperformed the overall market. 

Looking ahead, one market strategist I track closely, Martin Roberge of Canaccord Genuity, stated this in his weekly market wrap-up:

This week we are reminding clients that, in times of heightened political uncertainty, one must keep his/her eyes on corporate earnings. So far in Q3, 86% of S&P 500 companies have reported EPS above expectations. This is much higher than the ~70% historical beat rate. But more importantly, investors must keep in mind where we are in the earnings revision cycle. As our Chart of the Week shows, not only are we in the early phase, but, similar to past economic/manufacturing recoveries seen in 2009, 2013 and 2016 (second panel), our global earnings revision index has just broken above its one-year moving average (third panel). This suggests that a sustained recovery in corporate earnings is underway and should persist in 2021. Then, if history is a guide, the earnings tailwind should eventually push global equities to all-time highs. Already we have seen strong moves in Japanese and EM equity indexes. As such, non-US > US equities seems a safer strategy to stay put in stocks.

We shall see if a sustained recovery in corporate earnings is underway and if it persists in 2021. 

The bulls buying this week's breakout in stocks sure hope so, I remain skeptical and cautious.

Lastly, here are the top-performing and worst-performing large cap stocks this week:

And as a bonus, today I was checking out two biotech stocks getting clobbered, Bluebird Bio (BLUE) and Global Blood Therapeutics (GBT): 

 

Biotech dip buyers, keep these on your watch list but don't rush to buy them yet, there could be more pain ahead.

That's all from me, wish everyone a great weekend and I thank those of you who remember to kindly donate to this blog using the PayPal options on the top left-hand side under my picture.

Below, traders Pete Najarian, Stephen Weiss and Kourtney Gibson of Loop Capital Markets discuss the morning's market activity.

Second, legendary investor Bill Miller, Miller Value Partners, comments on the markets and what he expects from a Biden administration. Miller thinks there's still a lot to buy out there.

Third, billionaire investor Leon Cooperman told CNBC on Friday that he was concerned about the long-term outlook for the stock market because “too much debt is being created.”

Fourth, Mohamed El-Erian, president of Queens College, Cambridge, chief economic adviser at Allianz, and a Bloomberg Opinion columnist, says the market is “starting to live on its own” and is driven by the belief that central banks will provide more help. He speaks with Bloomberg’s Jonathan Ferro on "Bloomberg The Open."

Fifth, Scott Minerd, Guggenheim Global chief investment officer, told "Bloomberg Markets" the Federal Reserve may start buying equity ETFs soon. I think it's already doing it and keeping it hush.

Lastly, Dr. Scott Gottlieb, former FDA commissioner, joins 'Closing Bell' to talk about the increasing daily coronavirus cases in the U.S. and vaccine development. There's no therapeutic cure on the way, Gottlieb said. He says we're going to have to deal with the virus the old-fashioned way, by contact tracing. He joins 'Closing Bell' to discuss. Listen very carefully to his sobering comments.

Viking Cruises announced today an additional investment by its existing minority shareholders, TPG Capital and Canada Pension Plan Investment Board (CPP Investments), in Viking Holdings Ltd, the parent company of Viking Cruises.

The additional investment by TPG Capital, the private equity platform of alternative asset firm TPG, and CPP Investments, a professional investment management organization that manages the funds of the Canada Pension Plan, will result in approximately US$500 million of net proceeds being available to support Viking Cruises in its continued development.

“We are very appreciative that our shareholders from the prestigious institutions of TPG and CPP Investments are aligned with our vision for Viking’s future, which is bright. Over 40 years in the cruise industry have taught me that challenging times—such as these—are often also times of great innovation and opportunity. This infusion of equity capital will prepare us for future opportunities to continue developing our business,” said Torstein Hagen, Chairman of Viking. “Earlier this week we announced that Viking will further invest in the installation of full-scale PCR laboratories on each of our ocean vessels. These new onboard facilities—a cruise industry first—will provide unprecedented and robust testing capacity, enabling Viking to conduct up to daily PCR testing of all crew members and guests. This was the first in a series of announcements we have planned in the coming weeks, including our enhanced health and safety program and initiatives that will expand Viking’s global reach.”

“We are excited to deepen our partnership with Tor and the entire Viking team,” said Paul Hackwell, Partner at TPG Capital and Co-Head of Consumer investing. “Viking is truly a special company that continues to set the standard for the industry. We know that Viking’s guests are eager to get back to safely exploring the world in comfort, and are confident that the company will continue to deliver a differentiated experience for its guests in the years to come.”

“While the pandemic has posed many challenges, we have strong conviction that Viking’s unique global offering in the cruise industry will continue to be sought out by many guests well into the future. CPP Investments, alongside TPG, is looking forward to supporting Viking and its management team as they return to delivering high-quality, comfortable journeys around the world and build long-term value in the business in the time to come,” said Bill MacKenzie, Managing Director and Head of Active Fundamental Equities, CPP Investments.

The transaction is subject to customary closing conditions, including regulatory approvals.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that invests around the world in the best interests of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments in public equities, private equities, real estate, infrastructure and fixed income are made by CPP Investments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2020, the Fund totalled C$434.4 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

About Viking

Viking was founded in 1997 and offers destination-focused journeys on rivers, oceans and lakes around the world. Designed for experienced travelers with interests in science, history, culture and cuisine, Chairman Torstein Hagen often says Viking offers guests “the thinking person’s cruise” in contrast to mainstream cruises. In its first five years of operation, Viking has been rated the #1 ocean cruise line in Travel + Leisure’s 2016, 2017, 2018, 2019 and 2020 “World’s Best” Awards. In addition to the Travel + Leisure honors, Viking has also been honored multiple times on Condé Nast Traveler’s “Gold List” as well as recognized by Cruise Critic as “Best Overall” Small-Mid size ship in the 2018 Cruisers’ Choice Awards, “Best River Cruise Line” and “Best River Itineraries,” with the entire Viking Longships® fleet being named “Best New River Ships” in the website’s Editors’ Picks Awards. For additional information, contact Viking at 1-800-2-VIKING (1-800-284-5464) or visit www.viking.com. For Viking’s award-winning enrichment channel, visit www.viking.tv.

About TPG

TPG is a leading global alternative asset firm founded in 1992 with approximately $83 billion of assets under management and offices in Austin, Beijing, Fort Worth, Hong Kong, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, San Francisco, Seoul, Singapore, and Washington, DC. TPG’s investment platforms are across a wide range of asset classes, including private equity, growth equity, real estate, impact investing, and public equity. TPG aims to build dynamic products and options for its investors while also instituting discipline and operational excellence across the investment strategy and performance of its portfolio. For more information, visit www.tpg.com on Twitter @TPG.

Now, when I read this today after another manic Monday where stocks melted up following Pfizer's great news on its vaccine, I thought what great timing to announce this deal (and what great timing to announce Pfizer's vaccine on a Monday morning after President-Elect Biden was projected to win the US Election on Saturday).

The stock market loved that news and large cap cyclical stocks related to leisure and travel took off today, and along with them REITs and Energy stocks:

I stress slowly because vaccine or no vaccine, we are not heading back to pre-COVID demand on cruise lines or airlines. It's not going to happen, that much I can assure you.

To be honest, I was never a cruise line person pre-COVID. You couldn't catch me dead on a boat packed with tourists (had my fill of boat rides island hopping throughout Greece during my younger days). Just the thought of being on a cruise ship makes me sick to my stomach, and that won't change post-COVID.

But millions of others enjoy cruises and Viking Ocean Cruises isn't your run-of-the-mill cruise line company offering cheesy cruises, it caters to a sophisticated traveler and will likely continue to do well once the world gets back to some level of normalcy.

And CPP Investments and TPG are long-term investors who are playing the long game on Viking Cruises.

Interestingly, in late October, Bloomberg published an article on how Canada's top pension fund was hunting for deals in 'cheap" travel sector:

Canada’s national pension fund is looking at deals in the travel industry, confident that it will enjoy a strong recovery when the Covid-19 pandemic eases, says its chief executive.

“Hotels aren’t over, cruises aren’t over, flying’s not over -- these things are going to come back,” Mark Machin, CEO of Canada Pension Plan Investment Board, said Friday in an interview with Bloomberg. “So I’m supportive of teams if they find decent opportunities in those areas.”

The country’s largest pension fund, which has C$434 billion ($331 billion) of assets under management, hasn’t made any investments in the sector since the pandemic hit but is “keenly looking at some things,” Machin said. More than 20% of the fund is in private equity.

Its private holdings include ownership stakes in Spain’s Hotelbeds Group SL and Britain’s Merlin Entertainments Ltd., which runs Legoland theme parks and other attractions in 25 countries. It’s also an investor in Las Vegas-based Diamond Resorts International Inc., which it acquired as part of Apollo Global Management Inc.’s takeover of Diamond in 2016.

“Valuations are quite cheap. We’ve never bought an airline so I’m not suggesting we’d invest in airlines at this point,” Machin said. But other firms are -- Bain Capital LP rescued Virgin Australia Holdings Ltd. in a deal with creditors to restructure the business, which fell into administration in April.

That doesn’t mean there aren’t other opportunities. Machin said it’s unlikely that travel and hospitality-related companies will see their business recover to pre-pandemic levels soon, even if pharmaceutical companies are successful in producing a Covid-19 vaccine next year. It will take a while for public confidence to grow, he said -- but it will recover.

“I personally am a believer in us all being social beings,” Machin said. “I don’t think we’re all going to be sitting isolated for the rest of our lives.”

Mark Machin is right, we're not heading back to pre-pandemic levels soon but if public confidence grows, it will certainly help the beleaguered travel and hospitality industry and plenty of other industries (like restaurants) which have been slammed by the pandemic.  

One thing to note, however, is that CPP Investments prefers to hunt for bargains in private markets. Of course, its' doing the same in public markets too but these mega deals in private equity and private debt are where it's focusing its attention. 

But long-term investors can learn a lot from CPP Investments when investing in public equities. 

For example, if you like hotels over the long ruin, check out shares of Marriott International (MAR) which surged today but are well off their highs:

The same goes for Wynn Resorts (WYNN), one of the top performers today but well off its 5-year high:

What will happen is a gradual bottoming process which will be choppy and as the vaccine becomes more widely available and the economy improves, it will propel all these stocks higher.

Don't forget, COVID numbers are bad and they will get worse and most likely peak when president-elect Biden is sworn into office on January 20th.

We will see more vaccines and hopefully, better, faster and more reliable tests which will allow businesses to run properly without fear of spreading COVID.

That's all on the horizon but in the meantime, we will continue shopping online, practicing social distancing and hygiene.

By the way, CPP Investments is still playing that theme too. Last week, it announced a deal along with its partners Goodman and APG, and APG to increase its equity commitment to its UK logistics partnership by £900 million: 

Goodman Group, Canada Pension Plan Investment Board (CPP Investments) and APG Asset Management N.V. (APG) have each allocated an additional £300 million of equity to investment vehicles in the UK, targeting the logistics sector.

The expansion follows the success of the Goodman UK Partnership (GUKP) established in 2015 to invest in prime industrial and logistics properties on a long term basis.

Stephen Young, Director – Investment Management, Goodman UK, said “The Partnership sees us continuing our investment in strategic locations that meet the rising demand for modern, well-located logistics properties. Building on the strength of the UK portfolio to date, this increased commitment provides us with the equity to support the future development and acquisition of best-in-class urban logistics space where supply is limited and demand is driven by consumers.”

The additional commitment will be used to further expand the portfolio of high-quality, sustainable logistics and industrial properties strategically located on key arterial routes across the South East and M1/M6 corridors, as well as last-mile locations, particularly around Greater London.

Tom Jackson, Managing Director, Head of UK Real Estate, CPP Investments, said “Structural changes in the retail market and logistics supply chain, together with an acceleration of online consumerism, are driving strong demand for quality logistics space to service major population centres in the UK. We are delighted to be expanding our successful partnership with Goodman and APG to capitalise on the supportive sector fundamentals and increase our exposure to this asset class, ultimately delivering long-term value for CPP contributors and beneficiaries.”

Goodman Group is one of CPP Investments’ longest standing and largest global partners in real estate with partnerships established in Australia, Brazil, China, Hong Kong and the US.

Speaking of the increased equity commitment, Max Remmers, Senior Portfolio Manager Real Estate, APG, commented, “With this capital increase we continue to increase our allocation to this resilient segment of the property market, thereby focusing on supply-constrained infill locations which are benefiting from structural trends such as growing online penetration, supply chain reconfiguration and urbanisation. We are pleased to expand our partnership with Goodman and CPP Investments, which has proven to be successful in the UK as well as in other regions around the world. Goodman has been instrumental in developing and operating a significant part of APG’s industrial and logistics exposure globally.”

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that invests around the world in the best interests of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments in public equities, private equities, real estate, infrastructure and fixed income are made by CPP Investments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2020, the Fund totalled C$434.4 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

About Goodman

Goodman Group is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. Goodman Group, comprised of the stapled entities Goodman Limited, Goodman Logistics (HK) Limited and Goodman Industrial Trust, is the largest industrial property group listed on the Australian Securities Exchange and one of the largest listed specialist investment managers of industrial property and business space globally.

Goodman’s global property expertise, integrated own+develop+manage customer service offering and significant investment management platform ensures it creates innovative property solutions that meet the individual requirements of its customers, while seeking to deliver sustainable long-term returns for its investors.

For more information: https://uk.goodman.com/

About APG Group NV

APG is the largest pension provider in the Netherlands; its approximately 3,000 employees provide executive consultancy, asset management, pension administration, pension communication and employer services. APG performs these services on behalf of (pension) funds and employers in the sectors of education, government, construction, cleaning and window cleaning, housing associations, energy and utility companies, sheltered employment organizations, and medical specialists. APG manages approximately €536 billion (August 2020) in pension assets for the pension funds in these sectors. APG works for approximately 22,000 employers, providing the pension for one in five families in the Netherlands (about 4.7 million participants). APG has offices in Heerlen, Amsterdam, Brussels, New York and Hong Kong.

For more information: https://apg.nl/en/

Not much to say on this deal except that it's another great long-term deal for CPP Investments and its partners, Goodman and APG.

That wraps it up for me, on another manic Monday, November 9th, 2020.

Below, built with your comfort in mind, these understated, elegant Viking ships host just 190 guests. With fine dining, spacious staterooms and suites, magnificent destinations and tailor-made shore excursions, Viking River Cruises has earned more awards from leading travel authorities than any other river cruise line.

Integral ILS Ltd., the start-up insurance-linked securities fund manager launched by industry execs Richard Lowther and Lixin Zeng, has secured its first investor commitment, from Canadian pension giant the Public Sector Pension Investment Board (PSP Investments).

PSP Investments manages around CAD $169.8 billion of net assets and we understand this to be the pension giants first allocation to insurance-linked securities (ILS).

PSP has been exploring ways to enter the ILS market for some years now, we understand.

PSP is already affiliated and has a strong relationship with as a 30% owner of, direct risk originator and distributor AmWINS, which itself has a stake in Integral ILS Ltd.

Integral ILS was launched earlier this year and has been working on securing investor relationships, with a target of starting to build out its first ILS fund portfolio in time for the January reinsurance renewals.

Integral said that PSP Investments has provided it with significant LP (limited partnership) investment commitments to launch a new dedicated ILS strategy.

This new ILS fund strategy will be focused predominantly on natural catastrophe-linked reinsurance and insurance transactions.

“Integral is honored to have been awarded a cornerstone ILS investment mandate by top-tier pension manager PSP Investments. We appreciate the trust placed by PSP Investments in the Integral team and are committed to meeting their high expectations,” Lixin Zeng and Richard Lowther, co-founders and Managing Partners of Integral said.

“The Integral mandate represents PSP Investments’ first ILS allocation as part of our Alternative Risk Premium strategy,” added Eduard van Gelderen, Senior Vice President and Chief Investment Officer, PSP Investments. “ILS is an attractive asset class given its low correlation and diversification benefits for our portfolio. We are excited to enter into a long-term partnership with such an experienced and well- regarded team in the space.”

We understand Integral is aiming to begin by sourcing risk via its relationships with AmWINS and its other stakeholder reinsurance firm TransRe.

These relationships provide the manager with access to risk that can be fully-fronted and also much more diversified, than a typical start-up ILS fund manager would be able to achieve.

That will tick a lot of boxes for a relatively conservative investor like PSP.

Integral will also be able to write direct collateralized reinsurance and retrocession itself as well, using its recently established Bermuda special purpose insurer (SPI) Integral Reinsurance Ltd. (Integral Re).

Integral says that it aims to, “Drive further evolution in the ILS fund management model with an investor- focused fiduciary that also benefits from a long-term and stable alignment with industry leaders in reinsurance and insurance underwriting and distribution.”

We understand further investor discussions are underway and Integral is hopeful of announcing more commitments before year-end.

It's Remembrance Day and typically on this day, I sit down and look at recent deals PSP Investments has made because it is the Canadian pension fund that manages the pensions of the Canadian Armed Forces.

Anyway, this deal with Integral ILS caught my attention. 

Back in July, TransRe and AmWinslaunched launched the new insurance-linked securities (ILS) manager:

TransRe and AmWins have been confirmed as backers for the launch of Integral ILS Ltd., a new Bermuda based insurance-linked securities (ILS) fund manager.

Representatives from Integral informed our ILS-focused sister publication, Artemis, that the company has launched but remains in the early stages of development.

The fund manager is preparing to deploy capital by January 2021 with support from TransRe and AmWins, who will both take stakes in the company.

TransRe already owns a stake in ILS manager Pillar Capital, as well as its own TransRe Capital Partners division, while AmWINS has experience using its direct risk origination to channel business to ILS capital.

The backing of these two re/insurers is expected to assist Integral ILS in gaining access to re/insurance business, as well as fronted access to the open market, which TransRe also has some experience in.

The senior leadership at Integral ILS will be Richard Lowther, ex-Managing Principal of Hiscox ILS and Lixin Zeng, ex-CEO of AIG’s AlphaCat ILS unit.

They will be joined by Matthew Swann, Adriaan Van der Merwe and Emily Birrell, all of who are former Hiscox ILS employees.

Integral ILS remains focused on capital raising for now, but hopes to begin deploying capital and building a portfolio ahead of the January 2021 renewals.

Catastrophe risks will be the main focus and it will write insurance, reinsurance and retrocession, sources confirmed, with a special purpose insurer (SPI) likely to be utilized to begin with.

From the first press release above, it is clear Integral ILS got a significant capital commitment from PSP Investments and if I were PSP and Integral, I'd approach HOOPP to also commit capital to this new fund.

Why HOOPP? Because back in September, I spoke with HOOPP's CEO Jeff Wendling about their LDI 2.0 in a zero bound world and he specifically mentioned they are looking to allocate to insurance-linked securities:

In addition to infrastructure, it launched an insurance-linked securities (ILS) program. I'm not an expert on this but read a great comment on it from Marsh here. Basically, "ILS is another form of reinsurance available to insurance entities. However, instead of facing a rated balance sheet, the insurance entity faces a fully secure, collateralized form of funding dedicated to a precise risk requiring coverage. Usually the collateral takes the form of highly-rated, highly-liquid investments, such as government gilt funds or pure money market funds. Premium flows are determined by the type of risk and investor appetite."

If you've just heard about insurance-linked securities, take the time to read this comment from Marsh:

Increased pressure for growth and the need to be nimble in reaching financial objectives has made Insurance Linked Securities (ILS) an attractive capital efficiency option for many organizations in 2017. But what exactly is ILS and how does it tie in with captives?

ILS is another form of reinsurance available to insurance entities. However, instead of facing a rated balance sheet, the insurance entity faces a fully secure, collateralized form of funding dedicated to a precise risk requiring coverage. Usually the collateral takes the form of highly-rated, highly-liquid investments, such as government gilt funds or pure money market funds. Premium flows are determined by the type of risk and investor appetite.

How does ILS work?

The collateral for ILS is provided by capital market investors, for example an ILS investment fund, pension funds, institutional investors, and even other insurance companies. Such investors will purchase debt or equity issued by the ILS vehicle and will receive a coupon for this investment. Their capital is committed for the duration of the risk period and invested in the collateral account held on behalf of the ILS vehicle by a third-party trustee.

Traditionally, ILS has been used as cover for property catastrophe (CAT) type events, typically for windstorm or earthquake. Therefore there has been significant reliance on established modelling to demonstrate the nature of the risk to investors and provide more certainty about the event trigger as it relates to a specific event.

However, new risks are emerging for which this type of reinsurance is being used:

• A Swiss-based investment bank brought an operational risk insurance transaction to the market in 2016, via a quota share arrangement with a leading primary insurer.

• A European motor insurer transferred some of its motor third-party liability book to the ILS market towards the end of 2016.

From an investment point of view, ILS is considered  ”just another asset class,” but has always been seen as  uncorrelated to stock market movements, as ILS are generally only affected by the ‘wind blowing’ or the ‘ground shaking.’ The estimated size of the ILS market at the end of the third quarter of 2017 was approximately US$75 billion. Approximately US$30 billion of this market consisted of 144A CAT bonds (a syndicated debt issuance subject to SEC restrictions) with the remainder collateralized reinsurance transactions (usually one to two investors taking on the risk).

What about captives?

For companies with a captive entity as part of their risk management program, the captive can provide a means to reinsure corporate risks through ILS. This proves especially useful when there is limited capacity in the market for the type and level of risk involved or there is a desire to diversify the reinsurance tower.

Coverage can be provided through a Cat bond issuance or in smaller risk amounts using collateralized reinsurance programs. Coverage is negotiated directly between two counterparties with the risk transferred though an ILS transformer platform, which acts as the common link between the captive and the investor.

Some examples we have seen of captives using ILS for reinsurance include:

• Captive 1: In this transaction, the captive placed a US$200 million layer of coverage with a Bermuda ILS vehicle that provides coverage for storm surge risks and is based on a parametric trigger. Trigger events are linked to actual surge heights during named storms as measured by tidal gauges in key locations around greater New York City and the island of Manhattan.

• Captive 2: This captive placed US$275 million in reinsurance through a Bermuda ILS vehicle for named storm-related surge and wind risks, as well as earthquakes. Utilizing a parametric trigger, the CAT bond can be triggered if key intensity measurements of the physical parameters for each respective peril, captured at specified measurement locations, breach certain levels.

• Captive 3: Through a Bermuda ILS vehicle, this captive placed US$300 million of US earthquake risks, focused on the west coast and featuring a parametric trigger.

Putting captives’ capital to work

For captives, placing a higher layer of their reinsurance tower through an ILS structure provides access to collateral funds for low frequency, high impact events that can be released in a relatively short time frame. This means that funds can be put to work to help rebuild the captive parent’s business or to deal with client’s needs. There may also be positive solvency capital implications (especially in a Solvency II world) as the captive can ‘look through’ to the rating of the collateral being posted by the ILS vehicle.

Marsh & McLennan Companies, through GC Securities^[1], a division of MMC Securities LLC, and Marsh Captive Solutions have now launched Cerulean RE SAC Ltd (Cerulean), which is a Bermuda-authorized Special Purpose Insurer that provides access to collateralized reinsurance by utilizing ILS in an efficient and cost-effective manner. Through standardized transaction documentation, Cerulean provides a single point of access for cedents/captives to long-term capital markets-based protection and to capital markets investors seeking suitable investments in (re) insurance risk.

The future options for the use of ILS as a complementary form of reinsurance are unlimited, especially as interested capital market investors become more sophisticated in their underwriting capabilities and gain a deeper understanding of the risks they are willing to take on.  

I posted this comment to show you a few things:

• The ILS market is growing and catastrophe bonds (Cat bonds) make up the bulk of the market but other forms of reinsurance risks are being collateralized. 
• Insurance-linked securities are considered an asset class that has little to no correlation with stocks and bonds and are thus attractive to large pensions looking to diversify their returns.
• The market is growing, it is scalable and that too is of interest to large pensions looking for scale.
• There are risks in the ILS market which is why it makes sense to partner up with experts.
  

Artemis recently posted an article on how the Cat bond market is benefiting from a “flight to simplicity” in ILS:

The flight to quality in the insurance-linked securities (ILS) market has been well-documented, as some investors have opted to shift allegiance to ILS fund managers that are deemed higher quality, due to their longevity, track-records, or affiliations.

But now we can add to that a “flight to simplicity”, coined by RenaissanceRe CEO Kevin O’Donnell recently, specifically referring to the catastrophe bond market.

Together, quality and simplicity cover a lot of the bases that institutional investors are seeking within the ILS asset class at this time.

Institutional quality, quality of the portfolio of risks invested in, quality of track-record, quality of process, strategy, documentation, reporting, terms and conditions, people and partnerships, amongst other factors.

Simplicity goes hand-in-hand with some of these, particularly around the terms, conditions, precision of coverage and understanding of the potential for losses.

Nobody would ever say that catastrophe bond documentation is simple.

But the extensive nature of it, with well-defined terms and named perils often the focus, does make the predictability of what may happen during the term of a cat bond, in terms of losses or otherwise, or extensions and trapping of collateral, much simpler to understand and anticipate.

Compared to collateralized reinsurance portfolios, where terms can differ much more significantly from deal to deal, while coverage can be much broader, and trapping of collateral a little less predictable as a result.

Simplicity might also be termed certainty, as that it what investors are looking for at this time.

Not certainty that they won’t face a loss.

Institutional investors such as pension funds are extremely realistic when it comes to the ILS asset class and their potential to face losses.

Having performed their due-diligence and understood what it means to invest directly into assets that are exposed to insurance and reinsurance risk events, investors in ILS expect they can lose a lot of their allocation in a particularly bad year, some of it in a number of years and occasionally have relatively loss free years.

But greater certainty that the loss will be via an event that was expected, more predictable, less surprising and certainly not completely unexpected or unanticipated, is welcomed by many of them.

The catastrophe bond market offers a lot of these certainties and a good deal of simplicity, compared to more complex portfolios of reinsurance and retrocession underwritten in numerous forms of coverage, with numerous types of documentation.

Which is, of course, the natural way of the ILS market, that both these products are available and often are co-mingled together in ILS funds, that allocate a portion of their assets to the less simple, sometimes less certain collateralized reinsurance, with a portion also allocated to the perhaps more simple and certain catastrophe bonds.

On the heels of three years of major catastrophe losses and facing a fourth year of trapped collateral due to the COVID-19 pandemic, there is little surprise we’re seeing these flights, to both quality and simplicity.

RenaissanceRe’s CEO Kevin O’Donnell highlighted this for the catastrophe bond market, saying that his firms cat bond focused Medici fund had one of its best performances in its history in the third-quarter and looking forward, “we expect it to continue to benefit from the flight to simplicity the cat bond market is currently experiencing.”

Over the years, through the rise of collateralized reinsurance, repeatedly major pension funds and sovereign wealth investors have expressed a desire for more cat bond issuance, as the fully-securitized nature of an asset with features of secondary transferability, aligns much more closely with the kinds of assets they are used to investing in.

Cat bonds, in many institutions eyes, sit alongside other forms of debt and credit securities, in terms of how investable they are.

Where as collateralized reinsurance is often seen as more of a hedge fund type strategy, where a manager constructs investable portfolios from assets that aren’t immediately designed to be consumed in such a way.

Of course, at their heart, the two are much the same.

An insurance or reinsurance agreement, collateralized fully in some way and transformed into a security that can be invested in or consumed into an investment fund.

But the note like output of a full Rule 144a catastrophe bond issuance is still seen as the simpler investment option, which is why some larger pensions and multi-strategy investors allocate to the cat bond market directly, but don’t do the same with collateralized reinsurance.

Cat bonds also hold an element of simplicity for investors as they are a fully-underwritten asset, where analysis and modelling is done upfront by third-party service providers and the deals underwritten by experts, before the notes are issued, marketed and sold.

Cat bonds are also more broadly marketed, by broker-dealer groups, making them more accessible to more types of investors.

Collateralized reinsurance, on the other hand, requires access to risk and underwriting expertise in order to gain the contracts to be transformed, securitized, and invested in.

Cat bonds seem more readily investable and more easily so, to the majority of investors.

None of which is to say catastrophe bonds aren’t complex, hard to understand, don’t require underwriting knowledge of the risks and an ability to model them. They are also full of nuances, sometimes opaque and lacking in details of the underlying exposures.

But, at a time when the insurance-linked securities (ILS) market has faced losses and trapped collateral to the degree seen in the last few years, the catastrophe bond is coming out as a simpler, cleaner, perhaps more broadly accepted option, in some investor circles.

Alongside the flight to quality, this flight to simplicity will benefit the catastrophe bond market greatly and we could see a significant step up in size of the outstanding cat bond market (as a proportion of overall ILS assets) over the coming decade, we believe.

Already, 2020 has beaten its first annual record for the catastrophe bond market and right now seems set to beat pretty much all of the others.

Add to this the evident expansion in the range of cat bond sponsors that we’re seeing, such as the news of Google parent Alphabet seeking to become a cat bond beneficiary yesterday, as well as the entry of other new sponsors this year, and the future looks bright for catastrophe bonds.

You can keep up-to-date with the make-up of the catastrophe bond and ILS market using the Artemis Catastrophe Bond & ILS Market Dashboard, designed to be a simple and effective tool providing key data and statistics on every transaction (there are 700+) contained in their catastrophe bond & ILS Deal Directory.

Now, I did promise to cover other deals PSP Investments made but I'm going to keep that coverage short:

• Cubico Sustainable Investments has finalized the acquisition of a 16-MW portfolio of Italian wind farms for an undisclosed sum.The renewables investor, which is backed by Ontario Teachers’ Pension Plan and PSP Investments, said on Monday it has taken possession of two operational wind parks located in the Campania and Apulia regions. The assets, dubbed Bisaccia and Torretta, were acquired from Italian firm Blunova Srl.
• Tishman Speyer, one of the world's leading owners, developers, operators and fund managers of first-class real estate around the world and PSP Investments recently announced the sale of Tour Pacific to Société Générale Insurance for an undisclosed amount. PSP Investments and Tishman Speyer acquired the 53,000 sq.m. office building, located in Paris' La Défense business district, in 2013. Following an extensive renovation and refurbishment program that transformed this 20-year-old office tower into a modern and efficient building, they have successfully leased approximately 50,000 sq.m. to over 30 tenants including CA Technologies, McAfee, Whirlpool, Manhattan Associates, RSA, NTT and Accenture.
• In a separate deal, Tishman Speyer and PSP Investments acquired the Espace Lumière building in Boulogne Billancourt, a suburb of Paris, from a fund managed by Invesco Real Estate for an undisclosed amount. I expect them to refurbish it and sell it down the road (five years from now).
• In September, AirTrunk, a hyperscale data centre specialist, announced it would be entering into the biggest data centre market in Asia (excluding China) with a plan to construct a new 300+ megawatt (MW) hyperscale data centre campus in Inzai, Tokyo. The initial ~60 MW phase of the campus is targeted to open in late 2021 to support anchor customer demand.Earlier this year, a consortium led by Macquarie Asia Infrastructure Fund 2 (MAIF2), a Macquarie Infrastructure and Real Assets-managed infrastructure fund, and including PSP Investment, acquired an 88 per cent stake in AirTrunk, valuing the company at more than $A3 billion and providing necessary capital and expertise to further realize AirTrunk’s expansion plans across APAC. 

These are just some of the recent deals PSP Investments has entered with its partners and I'm sure there are plenty of others but PSP isn't big on providing details on all its deals, only the major ones make its news hub. 

What else? This week, I noticed PSP's Revera disaster is only getting worse as news broke out of a spike in deaths and COVID-19 cases at Edmonton and Winnipeg long-term care facilities owned by Revera (see details here).

It's fair to say 2020 has been a disastrous year for public and private long-term care facilities struggling to cope with the pandemic. I'm not sure how PSP and Revera are going to handle the blowback but there's no doubt in my mind that they need to reassess the pros and cons of owning long-term care facilities.

Lastly, today is Remembrance Day and I called my 88-year-old father to get the story of what happened to his father at the end of World War I.

My grandfather after whom I was named left Crete at the age of 17, got on a boat and ended up at Cedar Rapids, Iowa where he worked at a factory making starch for shirts (a big thing back then).

He fought for the US Army in World War I and on November 11th, they were on a train in France close to the German border when all of a sudden French people surrounded the train screaming: "Bosch Caputo!" (the Germans have fallen).

The US Army sent my grandfather and other US soldiers to Nice to relax where my grandfather stayed at the Atlantic Hotel. From there, they were taken to Marseille where my grandfather walked in the bazaar and heard some people working there cursing in Greek (there were quite a few Greeks living in Marseille at the time).

When World War I ended, my grandfather went back to the United States and settled right outside Chicago near the Indiana border. He worked as a mechanic for a large company manufacturing sewing machines and told my father that every Friday, people would cross the border from Indiana to Illinois to drink (prohibition was still in effect in Indiana, not Illinois).

Anyway, my grandfather worked for a while in the US after WWI and then moved back to Crete where he met my grandmother and had two kids, my father and my aunt. 

My grandfather didn't talk much about the war but he always spoke fondly of the United States and so did my grandmother as he received a pension from the US Army and after his death, she received it and was always grateful.

That's another generation, a great generation, and we should all remember the sacrifices they went through.

My father told me another story, during World War II, he was a young boy and he remembers they left Iraklio, Crete to go my grandfather's village outside the city (Kani Kastelli now called Profitis Ilias). 

They didn't have much food, were always hungry and cold and there was no electricity so at night they burned a wick in olive oil for light and it smelled.

The Battle of Crete ended up being a pivotal one during the Second World War and there are a lot of great books written on it but my favorite ones remain G.C. Kiriakopoulos'sTen Days to Destiny: The Battle for Crete and Anthony Beevor'sCrete 1941: The Battle and the Resistance.

If you're a history buff, read these books, they're phenomenal. You will also understand why millions of Germans are in awe of Crete and have visited the German war cemetery in Maleme outside Chania, one of the most important monuments of World War II in Crete. 

More than 15,000 German soldiers lost their lives during the Second World War in the Greek territory. The German military cemetery in Maleme is one of the two cemeteries in Greece where the graves of German soldiers are (the other cemetery is the German military cemetery Dionysus - Rapentozis in Attica).

Those were crazy times which is why my father and his Cretan friends don't have fond memories of their childhood, quite the opposite. 

That's also why my friend's father who also grew up in Crete during WWII calls us "The Butter Generation" because we never had to live through the real and brutal hardship of war (Thank God!).

Below, PSP Investments invests funds for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. PSP's CEO Neil Cunningham shares what Remembrance Day means for them and why they are proud to count Veterans among their people.

If you watch one thing today, watch this boy's reaction to his father's surprise return from a deployment in Afghanistan. https://t.co/VGghHeaxSvpic.twitter.com/NTFsKYIhW5

— ABC News (@ABC) November 10, 2020

I think a big part of such strategies' success is much more how and who implements these as opposed to the underlying securitized product. Because we could talk about ILS, but this is not a homogeneous thing, certainly not (yet) an asset class, and not (yet) sufficiently commoditized.

Given the above, what would matter is not to be in “ILS” for the sake of it, be it perceived characteristics related to diversification, etc. but having the right structure. This platform investment has the specialized expertise and experience in managing such exposures. PSP has an excellent record of approaching complex and novel investments capitalizing on the power of platform companies and specialized expertise, and it really makes a difference both from asset management and risk management but also the sourcing of new opportunities, expanding the reach and having a “foot in the ground.” 

Many of the Canadian funds have one way or the other a similar approach. The last is even more critical in today’s environment where both sourcing, due diligence and asset management face the challenges of travel and other restrictions. I remember somebody I respect a lot saying years ago related to the discussions on foreign offices, that PSP already has many “offices” globally because of the strong partnerships. This is why partner network and quality are an essential input in any private portfolio “optimization.”

Another point is that although something might be called the same, it does not mean that the expectations should be the same. For example, and this gets back to expertise, how PSP would approach Private Debt might be very different from those who would like to explore this strategy, saying, “we do Private Debt as well.” It is because there are specific ways how the strategy is thought about from the perspective of competitive advantages, timing and second-order benefits, structured and executed, and where (in NY in this case) which requires the people and expertise like David Scudellari, one of the highly regarded in the financial community, and a gentleman, to make it successful.

All of the above is very important because underneath the complex terminology and deal structure is the basic premise of a product, maybe a future asset class, where one regularly receives a premium but might face rare but substantial liability if the risky event materializes. The latter also describes selling put options, let us say, on an index and collecting the premium until the index gets a major negative hit, and the investor needs to pay. This is why the regular premium would show little volatility and correlation, almost like a bond, until the adverse event happens. Any diversification properties need to be properly accounted for and embedded in a proper risk measure from this perspective. But at least at this point, the best risk management has a well-thought-out structure, and expertise and experience, and it seems PSP has been doing precisely this the right way. Congratulations to Eduard and Neil!

The Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan are entering into subscription agreements with Intact Financial Corp. to support its conditional acquisition offer for RSA Insurance Group.

The Caisse, the CPPIB and the Ontario Teachers’ are committing $1.5 billion, $1.2 billion and $500 million, respectively.

“This is a significant opportunity to acquire an interest in a highly-differentiated insurer with a track record of growth and outperformance,” said Bill MacKenzie, managing director and head of active fundamental equities at the CPPIB, in a press release.

In a statement provided to Benefits Canada, Karen Frank, senior managing director of equities at the Ontario Teachers’, said the pension fund is pleased to be able to support Intact in the acquisition. “We have full confidence in Intact’s ability to generate shareholder value with this transaction given their strong track record over many years.”

In other investment news, the Ontario Teachers’ is part of a joint US$1.25 billion investment in Equis Development Pte Ltd., a company specializing in renewable energy, power grid distribution and transmission and waste infrastructure assets in the Asia-Pacific region.

Other investors include the Abu Dhabi Investment Authority and the Equis management team. EDL is currently developing or constructing 40 assets across its target markets.

“The company fits with our greenfield and renewables strategy to focus on development stage opportunities through high-quality platforms,”said Ben Chan, regional managing director for Asia at the Ontario Teachers’, in a press release. “We believe this investment will help us build scale in Asia and grow our exposure to renewables.”

I will discuss the Equis Development deal below.

Let me begin by telling you Mihail Garchev is hard at work on Part 5 of our integrated Total Fund Management series, working on case studies and he needed a bit more time. We will present Part 5 next week.

Now, Intact Financial Corporation put out a press release announcing an agreement with cornerstone investors to finance a portion of the purchase price of the possible offer for RSA Insurance Group PLC ("RSA"):

Further to the announcement on November 5, 2020 relating to the possible offer for RSA by Intact Financial Corporation (TSX: IFC) ("Intact" or the "Company") and Tryg A/S ("Tryg") (together the "Consortium"), Intact announced today that it has entered into subscription agreements with subsidiaries of each of Caisse de dépôt et placement du Québec ("CDPQ"), Canada Pension Plan Investment Board ("CPP Investments") and Ontario Teachers' Pension Plan Board ("Ontario Teachers'") for the aggregate issuance of 23.8 million subscription receipts at a price of $134.50 per subscription receipt for gross proceeds of $3.2 billion. CDPQ, CPP Investments, and Ontario Teachers' are committing $1.5 billion, $1.2 billion, and $0.5 billion, respectively. Completion of the offering is conditional upon the Consortium announcing a firm offer for RSA. Additional information on the proposed transaction is available at Intact's website at https://www.intactfc.com/English/investors/.

Each subscription receipt will entitle the holder to receive one common share of Intact as well as a commitment fee upon closing of the acquisition of RSA. The completion of the offering is subject to approval of the Toronto Stock Exchange and other customary closing conditions.

The subscription receipts and the common shares of Intact have not been, and will not be, registered under the U.S. Securities Act, or the securities laws of any state of the United States and may not be offered, sold or delivered, directly or indirectly, within the United States, except in certain transactions exempt from, or not subject to, the registration requirements of the U.S. Securities Act and applicable state securities laws. This press release does not constitute an offer to sell or a solicitation of an offer to buy any of these subscription receipts within the United States.

About Intact

Intact Financial Corporation is the largest provider of property and casualty (P&C) insurance in Canada and a leading provider of specialty insurance in North America, with over $11 billion in total annual premiums. The Company has approximately 16,000 employees who serve more than five million personal, business and public sector clients through offices in Canada and the U.S.

In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through belairdirect. Frank Cowan Company, a leading MGA, distributes public entity insurance programs including risk and claims management services in Canada.

In the U.S., Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, wholesalers and managing general agencies. Products are underwritten by the insurance company subsidiaries of Intact Insurance Group USA, LLC.

About 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 para-public pension and insurance plans. As at June 30, 2020, it held CA$333.0 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit www.cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that invests around the world in the best interests of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments in public equities, private equities, real estate, infrastructure and fixed income are made by CPP Investments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At June 30, 2020, the Fund totalled C$434.4 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

About Ontario Teachers' Pension Plan

The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with $204.7 billion in net assets (all figures at June 30, 2020 unless noted). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.5% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific regional offices are in Hong Kong and Singapore, and its Europe, Middle East& Africa region office is in London. The defined-benefit plan, which is fully funded as at January 1, 2020, invests and administers the pensions of the province of Ontario's 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

I will leave it up to you to read the full press release here as it also goes over forward looking statements and a long list of disclaimers, all standard stuff when entering a deal of this size.

CDPQ, CPP Investments and Ontario Teachers' are writing big tickets, committing $1.5 billion, $1.2 billion and $500 million, respectively to help Intact finance this acquisition (conditional offer).

CDPQ is committing the largest amount probably because Intact's head office is in Montreal (I believe) but the company has operations across Canada. You can read about it here, see its history here and its senior management team here.

Anyway, all three pensions are committing sizable amounts to help finance this conditional offer because they believe in the company, its senior managers and their ability to execute on its added value plan once this deal is completed.

This is Relationship Investing at its best where three top Canadian pensions are helping a large Canadian insurance company which is publicly listed (TSX: IFC) finance an acquisition of a UK insurer to grow its business there and all over the world.

Keep in mind, Relationship Investing is part of Canadian pensions' active equity strategy, it allows them to do bigger deals with publicly listed companies, often in the form of a subscription agreement where they can commit a big amount in exchange for fixed shares at an agreed upon price.

Basically, people working at Relationship Investing or "High Conviction" Equity teams at pensions invest across the equity asset class and along the liquidity range of pre-IPO, PIPEs and high conviction public companies.

At OTPP, for example, Russell Hammond is the Head of Global High Conviction and he leads a solid team dispersed across the globe. He reports to Karen Frank, Senior Managing Director and Global Head of Equities who is based in London.

At CPP Investments, Bill MacKenzie is the Managing Director and Head of Active Fundamental Equities. He heads the team responsible for delivering alpha through active security selection of public equity investments driven by bottom-up fundamental research. His past responsibilities include managing the team that focuses on global public equity investments in the Industrial, Energy and Materials sectors.

[Bill looks very familiar, I'm pretty sure he was in a few of my Economics courses at McGill in the early 90s.]

At CDPQ, I'm pretty sure all Active Equities strategies fall under Helen Beck's group. She is an EVP and Head of Equity Markets. One very sharp lady who runs a great team there.

Anyway, I did some reading on the RSA Group, the UK insurance company Intact is looking to acquire and here is what I learned: 

RSA is one of the world’s longest standing general insurers, providing peace of mind to individuals and families, and protecting small businesses and large corporations from uncertainty for more than 305 years

More about What we do

As the world has evolved and changed, so have the needs of our customers. As new risks and opportunities emerge, we constantly innovate and improve to serve our customers well. 

At RSA we provide award-winning personal, commercial and specialty insurance products and services direct-to-customers, via brokers and affinity partners.

It has operations all over the world, including in Canada and the United States. If you read more about this insurance company, you see there are excellent synergies with Intact Financial and it also appears to be the right cultural fit too. 

Interestingly, Intact Financial's shares got hit recently after they announced their intentions to acquire RSA but they are up nicely over the last five years and if this acquisition passes all the regulatory hurdles, I expect their share price will continue doing well over the long run: 

The insurance industry is a bit of a put selling strategy, you collect premiums and every once in a while you get hit and pay out claims.

The fact that large Canadian pensions are focusing their attention on insurance isn't an accident. With rates at ultra-low levels, they need to move away from bonds and collect yield elsewhere and putting more in real estate seems like a risky proposition in a post-pandemic world.

Unfortunately, deals of this magnitude don't come often but when they do, I'm pretty sure OTPP, CDPQ, CPP Investments and others will stand ready to pounce.

In another deal yesterday, OTPP announced it was part of a US $1.25 billion capital raising for Equis Development:

Equis Development Pte Ltd (“EDL”) today executed binding documentation with a wholly owned subsidiary of the Abu Dhabi Investment Authority (“ADIA”), Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”) and the Equis management team to invest US$1.25 billion in EDL.

EDL is focused on developing, constructing and operating primary and hybrid renewable energy and biomass generation, power grid distribution and transmission and waste infrastructure assets in Australia, Japan and South Korea. EDL is currently developing or constructing 40 assets across its target markets.

EDL will finance and be responsible for every stage of an asset’s lifecycle from origination, procurement, construction, engineering and development through to operations and maintenance, asset management and performance optimization.

In 2019, the Equis Group ceased raising and investing private equity funds and consolidated 100% of its ongoing investment initiatives and management team within a single Singapore corporate holding company, EDL. This corporate structure is ideally suited to enabling EDL to pursue and secure complex development stage projects.

Khadem AlRemeithi, Executive Director of the Real Estate & Infrastructure Department at ADIA, said: “We believe there is a significant opportunity to support the growth of renewable energy infrastructure in Asia Pacific. Equis has a strong management team with extensive development and operational experience and is well positioned to continue to build its reputation as one of the region’s leading renewable energy businesses.”

Ben Chan, Regional Managing Director, Asia-Pacific at Ontario Teachers' stated, “We are excited to make this significant investment in the world-class team at EDL. The company fits with our greenfield and renewables strategy to focus on development stage opportunities through high-quality platforms. We believe this investment will help us build scale in Asia and grow our exposure to renewables.”

EDL management has successfully implemented similar strategies in the past. They were responsible for creating Equis Energy, a US$5 billion renewable energy platform, and recently announced the divestment of two Japanese biomass generation assets for US$1 billion.

EDL expects to maintain its leading position within the Asian renewable energy and biomass power generation markets and having already entered the waste infrastructure market, is forecasting similar growth. Recently announced investments into the Korean waste and solar markets and Japanese biomass markets are all being undertaken by EDL.

Lance Comes, EDL Managing Director stated, “EDL plans to commit over US$2 billion into renewable energy and waste infrastructure assets across Australia, Japan and South Korea over the next two years and is rapidly expanding its management team of over 60 engineering, investment and development professionals to ensure its success.”

About Equis Development Pte Ltd (EDL)
EDL is Asia-Pacific’s leading renewable energy and waste infrastructure developer and operator with a successful track record of having developed over 200 renewable energy and waste infrastructure projects across the region. EDL has offices in Australia, Korea, Japan and Singapore with a focus on the developed markets within the Asia-Pacific region.

About the Abu Dhabi Investment Authority (ADIA)
Since 1976, the Abu Dhabi Investment Authority (ADIA) has been prudently investing funds on behalf of the Government of Abu Dhabi, with a focus on long-term value creation. ADIA manages a global investment portfolio that is diversified across more than two-dozen asset classes and sub-categories, including quoted equities, fixed income, real estate, private equity, alternatives and infrastructure. For more information, please visit www.adia.ae

About Ontario Teachers’
The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with C$204.7 billion in net assets (all figures at June 30, 2020 unless noted). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.5% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific regional offices are in Hong Kong and Singapore, and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded as of January 1, 2020, invests and administers the pensions of the province of Ontario's 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

ADIA's Khadem AlRemeithi and OTPP's Ben Chang explain why they have full confidence in the "world class team" at EDL and why this sizable capital raising makes sense. Learn more about Equis here.

The key passage in the press release above is this:

EDL management has successfully implemented similar strategies in the past. They were responsible for creating Equis Energy, a US$5 billion renewable energy platform, and recently announced the divestment of two Japanese biomass generation assets for US$1 billion.

EDL expects to maintain its leading position within the Asian renewable energy and biomass power generation markets and having already entered the waste infrastructure market, is forecasting similar growth. Recently announced investments into the Korean waste and solar markets and Japanese biomass markets are all being undertaken by EDL.

If you're going to invest in a renewable energy platform in Asia, choose your partner well and this is exactly what ADIA and OTPP did by partnering up with EDL.

Below, a history of the RSA Group, one of the world’s longest standing general insurers providing personal and commercial general insurance services worldwide.

Also, back in February, Stephen Hester, RSA Group chief executive, talked through the headlines of the company's 2019 full year results. 

I do hope this deal goes through, strengthening both RSA and Intact Financial and adding value to shareholders. 

U.S. stocks rose sharply on Friday as investors bet again on stocks that would benefit from a potentially effective vaccine and economic recovery next year.

The S&P 500 advanced 1.4% to 3,585.15, and posted a record closing high. The Dow Jones Industrial Average jumped 399.64 points, or 1.4%, to close at 29,479.81. The Nasdaq Composite advanced 1% to 11,829.29. The Russell 2000, which tracks small-cap stocks, jumped more than 2% to an intraday record, and posted its first all-time closing high since August 2018.

Shares of cruise operator Carnival rose more than 7%. United Airlines and Boeing were both up more than 5%. Disney closed 2.1% higher on the back of better-than-expected quarterly numbers. At the sector level, energy and industrials rose 3.8% and 2.2%, respectively, to lead the S&P 500 higher. Financials were up more than 1%. 

Both the Dow and S&P 500 logged strong weekly gains, boosted by Pfizer’s news on Monday that the vaccine it is developing with BioNTech was more than 90% effective in a trial. This caused a rotation into the cyclical stocks that would benefit from an economic comeback next year. Investors dumped technology shares which have held up during the pandemic.

The Dow rose 4.1% for the week, and the S&P 500 closed 2.16% higher over that time period. The tech-heavy Nasdaq lost 0.6% this week, notching its third weekly loss in four weeks.

“This week’s positive vaccine news is a game-changer in our view, as it allows the market to look through the recent surge in COVID-19 cases to the impending end of the pandemic and broader reopening of the economy,” wrote Marko Kolanovic, JPMorgan’s head of macro quantitative and derivatives strategy, who was among the first to call the market’s turn in March.

However, the rotation paused midweek as traders worried that a rising number of coronavirus cases could hit the economy significantly before a vaccine gets here.

A CNBC analysis of data compiled by Johns Hopkins University showed average daily new cases are up by at least 5% over the past week in at least 47 states. Hospitalizations, meanwhile, rising in at least 46 states. On Thursday alone, more than 150,000 cases were confirmed in the U.S.

The resurgence in coronavirus cases has also led some parts of the country to re-adopt stricter social-distancing measures. In Chicago, Mayor Lori Lightfoot asked residents to cancel their Thanksgiving plans and stay indoors as cases rise in the city. In New York state, Gov. Andrew Cuomo said new curfews on bars, restaurants and gyms will take effect on Friday.

Phillip Colmar, partner at MRB Partners, wrote in a note that the global economic recovery “will be sustained, but the V-shaped portion is over, and we have already transitioned to a slower pace of two-steps forward and one back.”

Federal Reserve Chairman Jerome Powell also said Thursday the country’s economic outlook remained uncertain. “With the virus spreading, the next few months could be challenging,” he said.

Alright, it was another big week in the stock market, spent the day looking at a bunch of stocks and charts and I'm a little wiped but will muster on to complete my market comment.

Let's begin with the fun stuff, this week's best performing sectors and best performing stocks (all stocks and large caps):

Not surprisingly, following the good news on Pfizer's vaccine results that broke out on Monday morning (conveniently before the market open and after President-Elect Biden was proclaimed the winner last weekend), stocks surged on Monday led by beaten down airlines, cruise lines, casinos, hotels, REITs, energy and anything else that moves with positive news on the health front.

As shown above, cyclical stocks fared the best this week led by Energy (XLE), Financials (XLF) and Industrials (XLI). No surprise to me, Energy has been clobbered this year and in September, I told my readers to keep Big Oil on their radar.

Technology stocks (XLK) were marginally down this week as many of the cloud and fintech high-flyers that rallied sharply this year got hit hard this week, as did popular stay-at-home stocks:

What else? The bubble in electric car shares continued, prompting me to tweet this earlier today:

$LI$NIO Electric car bubble going FULL EXPONENTIAL this week as market digests news from Li Auto (LI).Check out shares of rival NIO, went from $3 to over $50 this year and holding and adding to gains. Unbelievable, if you don’t think there’s an ESG bubble, you’re delusional! pic.twitter.com/KREkjiGHRq

— Leo Kolivakis (@PensionPulse) November 13, 2020

Then a big reversal happened. At one point, shares of NIO were down 25% from the morning high where they were up more than 10%, before settling down 8% on massive volume:

I'm serious, these are crazy markets and they can leave the best traders dazed and confused:

Trading in current market $SPX, $SPYpic.twitter.com/MLptxzOz3z

— Johns Charts (@johnscharts) November 12, 2020

Welcome to the wacky world we live, compliments of the Federal Reserve and other global central banks increasing their balance sheet by trillions to "fight the pandemic" (Wall Street speculators love liquidity orgies, especially when they get money for nothing and risk for free!).

Of course, while everyone is cheering on Wall Street, the reality is COVID-19 cases are surging in the United States and Europe where a mutated strain of COVID-19 is wreaking havoc there:

California just became the second state to surpass 1 million reported Covid-19 infections since the start of the pandemic, according to Johns Hopkins University data — closely following Texas, which hit the grim milestone earlier this week https://t.co/gllyih1NJd

— CNN (@CNN) November 13, 2020

A mutated strain of Covid-19 that developed in Europe was able to out-compete and eventually dominate the original virus by being much more infectious—replicating nearly 10 times faster and being much better at airborne transmission than the original strain https://t.co/HWmd87UesIpic.twitter.com/CpQk7lzpje

— Forbes (@Forbes) November 13, 2020

And while Wall Street bulls are cheering every vaccine success story, some are sounding the alarm and hunkering down for what can be a rough few months ahead:

How a Covid-19 Vaccine Could End Up Helping the Virus Spread - Bloomberg https://t.co/FSjgLDwckh

— Leo Kolivakis (@PensionPulse) November 13, 2020

https://t.co/VFpIhmiKNj

— Forbes (@Forbes) November 13, 2020

pic.twitter.com/f97adSPs5K

— Donald J. Trump (@realDonaldTrump) November 13, 2020

The crisis isn’t Trump. It’s the Republican Party. https://t.co/fyvsKE9oCy via @voxdotcom

— Leo Kolivakis (@PensionPulse) November 13, 2020

Highlight: “We look at the growing regional bifurcation of America,” Hedgeye Author and Managing Director of Demography @HoweGeneration says about the political divide. “It creates a situation [with] either the red zone or the blue zone ... being either nullifying or seceding.” pic.twitter.com/sqab9GB04J

— Yahoo Finance (@YahooFinance) November 13, 2020

Let's hope that never happens but the way things are headed, you never know.

All I know is while the bulls enjoyed a great week on Wall Street, reality is settling in and that means the next couple of months will be far more challenging.

I would caution my readers to stop listening to all the nonsense about the "market looking past the surge in COVID cases, more hospitalizations and deaths" and hunker down for a long, cold winter of hell.

Don't get me wrong, I welcome all positive news on vaccines and other treatments but I tell everyone, you need to hunker down over the next six months, keep wearing your mask, wash your hands often, practice social distancing and take a minimum of 1,000 IUs of vitamin D a day (if not three times that amount during the winter) to mitigate against the effects of COVID-19:

Researchers around the globe are investigating whether vitamin D, known as the sunshine vitamin, can help reduce people’s risk of catching the new coronavirus and even aid in treating patients with Covid-19.

— The Wall Street Journal (@WSJ) November 12, 2020

Never mind the skeptics and naysayers, I've been taking high dose vitamin D for over 20 years and I never get the flu (no flu shot in over a decade) and just don't get sick.

Of course, my immune system is super strong, too strong, but I tell everyone, take your daily dose of vitamin D, give it to your kids, and practice social distancing, hygiene and wear your bloody mask when in public (this garbage that it's anti-American has to stop, what is anti-American is recklessly killing innocent people even if that's not your intention, so wear your mask in public!).

Alright, that's it from me, wish you all a great weekend and I thank those of you who take the time to support this blog using the PayPal options on the top left-hand side under my picture.

Below, CNBC's "Halftime Report" team discusses how they're investing amid the surge in coronavirus cases across the United States.

Fourth, Donald Trump's legal challenges against the outcome of the US election is running out of time and plausibility as the Senate and world leaders begin to acknowledge Joe Biden's victory, according to the US Studies Centre's Simon Jackman. 

Also, take the time to listen to a discussion with Scott Omelianuk, Laura Rozen and Douglas Murray on Anthony Scaramucci's Mooch FM here. Great discussion, I thank Ken Kostarakis for sharing it.

Last but not least, Fed Chairman Jay Powell participated Thursday in a policy panel before a European Central Bank Forum on central banking. The appearance featured a question-and-answer session with the US central bank chief. Take the time to listen to his comments.

A new governance study has confirmed what many United Nations Joint Staff Pension Fund observers have long surmised: there are significant variances between the fund’s own operations and best practices and those of pension funds elsewhere.

The areas reviewed by Mosaic Governance Advisors, who prepared the study, include standards of professional and ethical conduct, conflicts of interest and oversight of culture.

There were certainly clues as to problems: two internal audits conducted by the UN Office of Internal Oversight Services, one a comprehensive governance audit in 2018 (A/73/341) and the other an investment office governance audit in July 2020 (A/75/215), found that the fund’s culture needed to change to address conflicts of interest and other threats to the fund’s health and sustainability.

The standard response to turmoil in the 71-year old, 212,000-member fund, currently worth $75.2 billion, has been to make serial changes in its top leadership while an entrenched old guard in the fund and on the board ensures that improvements are slow to arrive and are largely cosmetic.

Tone at the top

The 2018 internal governance audit, mandated by the UN General Assembly, called for the pension board to ensure that the pension administration “sets the appropriate tone at the top with regard to integrity and ethical values.”

The 2020 internal investment governance audit found that the fund’s Office of Investment Management under Sudhir Rajkumar, Secretary-General António Guterres’s former representative for investments (a position known as the RSG), lacked “an appropriate tone at the top with regard to the highest ethical standards of behaviour that are expected of officials entrusted with fiduciary responsibilities.”

Player and referee

The 2020 investment audit substantiated the allegations of the four UN participant representatives to the board and their alternates, who represent 85,000 UN staff members, that the investment office suffered from a toxic work culture that included retaliation against personnel. It also found a lack of safeguards on decision-making and conflicts of interest in the investment office.

In addition, the audit found that the “merging of management and oversight functions in a single post has enabled the Representative to set the rules and to act as ‘player’ and ‘referee’ at the same time,” which may “stifle critical review of proposals and compromise the due diligence, including risk analysis, that is performed by subordinates of the Representative. . . .”

Rinse and repeat

While the pension board warmly endorsed policies put in place by Rajkumar over his two-year tenure, which lasted from January 2018 to March 2020, the participant representatives tried to alert Guterres to practices that they said exposed the fund to more risk and decreased liquidity. But it was to no avail.

These actions followed an earlier pattern. Beginning in 2014, the participant representatives raised allegations about conflicts of interest in the fund’s administration arm and faced vigorous pushback by the board. In 2018, when the comprehensive governance audit was published, the board, except for the UN participant representatives, rejected most of the findings and recommendations and tried to discredit the auditors.

The General Assembly responded by making sweeping reforms and requested the board to review and report on many of the same important governance recommendations that it had rejected (74/263).

A client-averse culture

For too many years, the fund administration’s practices have reflected a client-averse culture. A UN internal audit published in 2017 confirmed the UN participant representatives’ allegations that over a two-year period beginning in 2016, the administration severely underreported the scope and extent of an unprecedented backlog in pension payments.

This year’s report by the Board of Auditors substantiates their concerns that the fund administration’s claim of a “more than 90 per cent” compliance rate to process initial separations within 15 days is based on stopping and restarting the clock when documents are discovered to be missing.

The same report also confirms concerns that the deployment of the head of the fund’s Geneva office (a financial expert) and another chief of finance to nonfinance posts in New York City headquarters was based on false assumptions of underperformance. The auditors discovered the real reason the Geneva office processed fewer cases — it had fewer staff for a similar number of clients. The staff transfers resulted in underservicing beneficiaries from Europe, the Middle East and Africa as well as a loss of institutional financial knowledge and leadership. The former head of the Geneva office has since been involuntarily placed in another UN office while still being on the fund’s payroll.

Participant representatives view this situation and the longstanding matter of the dismantled fund executive office — where two senior personnel were relocated in 2016 to another UN office where both remained on the fund’s payroll until one was transferred recently — as a breach of the fiduciary duty to use pension funds solely for the administration and payment of benefits.

The curious case of the former head of investments

On March 29, as Covid-19 rocked financial markets and investments in the fund took a nosedive (from $71.9 billion on Dec. 31, 2019 to $63 billion on March 31, 2020, a drop of about 10 percent), Guterres’s spokesperson announced Rajkumar’s departure without explanation, saying that the secretary-general was naming Pedro Guazo as his acting representative.

Only three months earlier, Guterres had renewed Rajkumar’s contract for two years, despite allegations by the UN participant representatives of a hostile work culture and risks to the system of checks and balances, a situation that the internal audit largely confirmed.

That the value of market assets has rebounded to $75.2 billion as of Oct. 23 doesn’t belie concerns that Guterres’s apparent inaction in response to anxieties about the investment office and his renewing Rajkumar’s contract could have exposed the fund to further risk in the volatile Covid-19 economic environment.

‘If it ain’t broke. . . .’

Returning to the 2020 external governance study (Mosaic) that revealed variances in standards of professional and ethical conduct, the consultants also found significant differences between that of the UN fund and other pension funds’ best practices in board size; composition and allocation of seats; and the terms, roles, purpose and responsibilities of the board.

The board’s decision to have its governance working group further examine Mosaic’s study and submit a report to its next session are cause for wonder about the prospects for implementing the proposed reforms, given that the working group had earlier produced an anemic report to the General Assembly on many of the same topics and that triggered its request for an external review initially.

Despite the study’s findings of significant variances between the pension fund’s governance and best practices in all the areas it reviewed, a UN retiree representative voiced repeatedly to the board that “if it ain’t broke, don’t fix it.” Chief among his criticisms was that the study exceeded its mandate and that the fund simply had no peer because of its “unique global nature,” both well-worn responses of his group to calls for change.

Representatives of UN retirees are influential members of the board and its committees, and they punch well above their weight as a retiree organization with nonvoting status on the board and that counts a mere one-third of UN retirees among its membership. They led the board’s rejection of the Assembly’s request to consider modalities for UN retirees to directly elect their representatives.

It is the same retiree representative organization that the 2018 comprehensive governance audit cited for conflicts of interest and “the appearance of collusion . . . [with] the Fund secretariat to challenge the authority of the Secretary-General and the General Assembly in governance matters of the Fund. . . .”

Swimming against the tide

On the 33-member tripartite board, composed of elected participant representatives, UN executive heads and governing bodies, the UN participant representatives are often isolated in their positions. They have been targets of intimidation and efforts to prevent some of them from taking their seat on the board. In addition, one person in the group was unlawfully suspended last year.

The representatives have nevertheless consistently pushed for timely benefit payments and a system to alert members that their benefits are about to be forfeited. At the annual (virtual) board meeting in July, they worked with other board members to stop amendments to regulations proposed by the chief executive of pension administration, Rosemarie McClean. The amendments would have curtailed benefit eligibility for widows and children not declared to the UN while the staff member was working.

As noted in the board’s 2020 report, the representatives continue to push back against attempts to increase the fund’s operating costs, to enable the board to remove itself from the jurisdiction of the UN Appeals Tribunal and to prevent fund staff members from running for board seats.

Ominously slow to change

The participant representatives noted in a communiqué to their constituents after the July board meeting that the fund is in a good financial position, “due in part to the unprecedented level of intervention of governments and central banks to maintain the high value of financial markets.”

Although Guazo, the new acting head of investments, said he was committed to addressing the investment audit’s recommendations, the participant representatives remain concerned about the slow rate of implementation.

Symptomatic of the fund’s inability to change its culture and similar to the situation in the pension administration after the departure of the previous head, Sergio Arvizù, the participant representatives note that some senior personnel who had roles in constructing the failed policies — as revealed in the recent investment governance audit — still have their jobs.

Restoring trust

McClean took up her functions as chief executive of pension administration in January. She noted in her presentation to the board meeting in July that “the Fund needed a clear strategic direction and improved trust among its stakeholders.”

Indeed, among the findings of the Mosaic study, it noted “insufficient clarity, transparency and communication at all levels within the governance structure and with stakeholders” and said that “rebuilding trust should be a priority.”

The cumulative message from internal audits and the Mosaic study is that while cosmetic changes are possible, meaningful reform cannot be realized without a radical change in the fund’s culture. But breaking that grip is challenging, particularly when the old guard remains firmly in place and a lack of term limits keeps some board members installed for decades.

As one example of superficial change, Michelle Rockcliffe, a participant representative, cites the fund’s response to the General Assembly’s directive to split the role of chief executive officer into two separate functions. In her view, “the manner in which the separation has been carried out has diminished the role of the secretary of the board, and ensured that the General Assembly’s goal of eliminating inherent conflicts of interest and making that role fully independent of the chief executive of pension administration has been undermined.”

Cutting to the heart of fund culture, the UN participant representatives emphasize that while the General Assembly has asked the board to develop a code of conduct, a number of members appear keen to use it to reduce transparency while leaving conflicts of interest unresolved.

 The General Assembly: more action needed

Audits, studies and Assembly reforms can go only so far when the people responsible for the fund’s oversight and management have neither the ethical culture nor the political will to carry them out.

Ian Richards, a UN participant representative and former president of the Coordinating Committee for International Staff Unions and Associations (CCISUA), told PassBlue: “Staff are really worried about how their pension fund is being administered and have asked us to fix it. They also want it kept within the jurisdiction of the UN tribunal. We’ve done all we can. Now the General Assembly needs to act on the evidence before it. It can’t kick the can down the road.”

The Assembly must decide on which recommendations it will follow from the Mosaic report. That includes acting on its own 30-year-old request for reform and fair and equitable representation on the pension board.

Only then can the fund begin to improve its culture and become the ethical and efficient organization it was always meant to be.

What a mess. Where do I begin?

First, let me be blunt: the best thing that ever happened to the UN pension fund is they hired Rosemarie McClean from Ontario Teachers' Pension Plan in 2019 where she was the Chief Operating Officer, Enterprise Operations.

But I immediately warned Rosemarie that the UN is a sewer of politics and the United Nations Joint Staff Pension Fund isn't immune from this sewer. I put her in touch with a former senior member of the  Fund who gave her the lay of the land.

Now, I read parts of the study prepared by Mosaic Governance Advisors and to my surprise, it's decent, not perfect but very detailed and well done.

I'd bring to your attention the statement of the CEO, Rosemarie McClean on page 14: 

The Chief Executive of Pension Administration outlined her first impressions from her first six months in the office and her vision. She noted that the Fund staff was extremely dedicated and hard-working and that the enterprise resource planning system (Integrated Pension Administration System) was stable. However, she added that further information technology investments were critical to the future success of the Fund. Reflecting on her more than 30 years’ experience in the pension industry, she noticed that the Fund lacked advanced data analytics, which would drive better decision-making, and a communication strategy, which would serve clients and inform stakeholders. She noted that the Fund needed a clear strategic direction and improved trust among its stakeholders.

The Chief Executive stated that her goals were to renew the focus on client experience, to make the Fund a paperless organization and to modernize its services. Such business transformation would be based on innovation, reviewing and changing the existing processes to make them more efficient, upscaling skills and testing robotic automatization, with a view to further improving and cultivating service delivery.

There's no doubt that Rosemarie McClean can bring the UN pension fund up to par technologically and significantly improve the client experience.

I'd recommend she talk with Ken Akoundi at Cordatius, a company that helps long-term investors deal with information overload, data inaccuracies, incomplete information, inefficient processes, dated technologies, overpromising vendors, and difficult implementations.

But I see bigger problems at the  United Nations Joint Staff Pension Fund that are structural, not operational in nature.

In particular, they need to totally bomb the current governance framework and replace it to something akin to what Ontario Teachers' Pension Plan where Rosemarie used to work or CPP Investments or any of Canada's large pensions have in terms of governance.

Importantly, the UN pension fund should have an independent board where top investment and other professionals are appointed not by politics but by qualifications and this board has to be completely independent from the UN. 

Huh? What? You heard me, get the UN completely out of the operations of its massive pension fund, let an independent board oversee senior managers who run the day-to-day operations of the Fund and they can publish a very transparent annual report of their activities every year.

What else? Move the hell out of New York City! The UN pension fund should be based here in Montreal. Not New York City and not even Toronto, the North American mecca for pensions but Montreal which is multilingual and has two of the largest pensions in Canada and tons of pension talent.

[Note: On 6 June 1946, toward the conclusion of the first PICAO Interim Assembly, Montreal, Canada was selected as the permanent headquarters of the International Civil Aviation Organization (ICAO), by 27 votes. I think they should move their pension fund here.]

I've been saying this for years: get the UN pension fund out of New York City and as far away from the UN as possible and more importantly, get the governance right once and for all. 

Again, this is me, Leo Kolivakis, publisher of Pension Pulse talking, not Rosemarie McClean. I haven't exchanged a peep with Rosemarie since she assumed her new role and I suspect she is extremely busy and it's not an easy job to assume in the middle of a pandemic.

I have extremely strong views on the United Nations Joint Staff Pension Fund. I make no apologies whatsoever and I know enough about the UN and how much dirty politics goes on in that organization.

Too many people there are power hungry and they think they're smarter than everyone else, but when it comes to their pension plan, most of them are completely and utterly clueless as to how to improve its governance and what really needs to be done to improve it over the long run.

In short, get the United Nations out of managing anything in regards to its pension fund. Nominate an independent and qualified board, pay professionals to manage assets in-house and let them do their job focusing on the mission of the plan and what is in the best interests of its members over the long run.

Over 25 years ago, I was part of the McGill Model UN club, had loads of fun going to Harvard, Yale, Princeton, Columbia University, UPenn and other places debating really smart students.

We won a lot of the prizes because we had a secret weapon -- Tim Wu -- who is now a professor at Columbia Law School and is widely known for coining the term net neutrality in 2002 and championing the equal access to the Internet.

Tim was a force to be reckoned with back then (he studied biochemistry at McGill before going on to Harvard Law) and he's still an intellectual tour de force who has authored several important papers and many great books. 

Anyway, Tim wasn't the only smart member, we had a bunch of smart people in that club and we had a lot of fun debating great teams from great universities back then and visiting beautiful cities. We believed in the United Nations and its mission.

Unfortunately, as I grew old and cynical, I realized the United Nations has become a cesspool of politics and the organization is completely corrupt and even though there are great people working there, its bureaucracy is stifling and weighs on all aspects of the organization, including its pension fund.

Again, these are my opinions, don't attach them to Rosemarie McClean who I know is doing a fantastic job there given the many challenges she has had to face, COVID-19 being the least of them.

Below, last year, the United Nations Joint Staff Pension Fund celebrated its 70th year. Let's hope it will celebrate 70 more and that they get the governance right and move it far away from the United Nations headquarters.

Canada Pension Plan Investment Board returned 5% in the quarter ending Sept. 30 on the strong rebound in equity markets, which lifted the value of public and private holdings in the country’s largest pension fund.

The fund’s growth to C$456.7 billion (US$349 billion) in its fiscal second quarter was attributed to gains in a broad range of asset classes, CPPIB said in a statement on Monday. A stock market pullback in September, driven by concerns over renewed lockdown measures and the lack of a new stimulus package in the U.S., tempered some of these gains.

“CPP Investments’ diversified fund performed well this quarter, generating strong returns,” Chief Executive Officer Mark Machin said in the statement. “However, we continue to be cautious about the months ahead given the highly uncertain economic fallout of Covid-19 and its effect on markets.”

Key Insights

• Ten-year and five-year annualized nominal returns were 10.5% and 9.6%, respectively, net of costs
• CPPIB’s additional account reached C$4.1 billion in assets versus C$3.3 billion the quarter before. Investment returns were 3%
  • This account is made up of additional contributions CPPIB started receiving in January 2019 after the government decided to expand the plan. CPPIB invests this money differently than its base account
• “All of our investment departments generated positive returns this quarter. Our investment professionals continue to pursue opportunities that will bring value to the fund over the long term,” Machin said
• CPPIB holds nearly C$44 billion in real estate. In May, Machin said office towers won’t stay out of favor forever.
  • “There’s probably going to be still robust demand for great office space in central locations,” Machin said in an interview with Bloomberg TV. “Once there is decent immunity across the population or some lowering of the mobility of the disease, you’ll get people wanting to be with each other. This is human nature and the office is a part of that.”
• CPPIB held C$143.6 billion in public equities and C$112.2 billion in private equities as of Sept. 30, while government bonds accounted for C$97.4 billion of the portfolio and credit was C$55.2 billion
• Machin told Bloomberg News last month that the fund is looking at deals in the travel industry, confident that it will enjoy a strong recovery when the Covid-19 pandemic eases. The fund subsequently said it would invest more in Viking Cruises
• In September, CPPIB promoted Edwin Cass to the newly created role of chief investment officer amid a push to more than double its assets under management

I already covered Ed Cass's nomination to be CPP Investments' first-ever CIO here. 

Last week, I covered how CPP Investments is cruising for value.

Yesterday was the final day to report 13-F filings for Q1 for institutions and I checked out CPP Investments'top holdings and where they added last quarter:

It confirms that CPP Investments might be cruising for value but it's in no rush to buy beaten down re-opening stocks. Maybe the vaccine news from Pfizer and Moderna will change all that but I doubt it.

That's why when CNBC Trading Nation tweeted this earlier:

Is it time to return to the skies? @MarkTepperSWP and @toddgordonTA discuss Jefferies' split airlines call $LUV$DAL$UAL$AALpic.twitter.com/7n42UI23JS

— Trading Nation (@TradingNation) November 17, 2020

I replied: "No rush, it's dead money for a while."

People get too excited with vaccines but the problem is they have no medical training and don't realize they're not a magic pill.

This morning I was listening to a real medical scientist who stated flat out: "We are encouraged by the news from Moderna and Pfizer but we need to review the full data set and have it peer reviewed."

That's a true medical scientist, she knows what she's talking about.

CPP Investments has to two doctors leading their organization: Dr. Mark Machin (CEO) and Dr. Heather Munroe-Blum who was reappointed as Chairperson of the Board for a term of three years ending in October 2023. 

They are both trained medical doctors who don't get carried away with media hype on vaccines.

Anyway, let's review CPP Investments'long press release on its second quarter Fiscal 2021 results:

Canada Pension Plan Investment Board (CPP Investments) ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $456.7 billion, compared to $434.4 billion at the end of the previous quarter.

The $22.3 billion increase in net assets for the quarter consisted of $21.6 billion in net income after all CPP Investments costs and $0.7 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 10.5% and 9.6%, respectively. For the quarter, the Fund returned 5.0% net of all CPP Investments costs.

For the six-month fiscal year-to-date period, the Fund increased by $47.1 billion consisting of $44.5 billion in net income after all CPP Investments costs, plus $2.6 billion in net CPP contributions. For the period, the Fund returned 10.8% net of all CPP Investments costs.

“CPP Investments’ diversified Fund performed well this quarter, generating strong returns. However, we continue to be cautious about the months ahead given the highly uncertain economic fallout of COVID-19 and its effect on markets,” said Mark Machin, President & Chief Executive Officer, CPP Investments. “All of our investment departments generated positive returns this quarter. Our investment professionals continue to pursue opportunities that will bring value to the Fund over the long term.”

The Fund’s growth is primarily attributed to the continued recovery of global public equity markets in the first two months of the quarter, reflected in gains in both the Fund’s public and private holdings. Stock markets retracted in September driven by concerns over new COVID-19 lockdown measures and uncertainty related to monetary stimulus, tempering these gains.

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.

Fund 10- and Five-Year Returns^{1, 2, 3}

(for the period ending September 30, 2020)

 

Performance of the Base and Additional CPP Accounts

The base CPP account ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $452.6 billion, compared to $431.1 billion at the end of the previous quarter. The $21.5 billion increase in assets consisted of $21.5 billion in net income after all costs, less $54 million in net base CPP outflows. The base CPP account achieved a 5.0% net return for the quarter.

The additional CPP account ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $4.1 billion, compared to $3.3 billion at the end of the previous quarter. The $0.8 billion increase in assets consisted of $0.1 billion in net income and $0.7 billion in net additional CPP contributions. The additional CPP account achieved a 3.0% net return for the quarter.

The base and additional CPP differ in contributions, investment incomes and risk targets. We expect the investment performance of each account to be different.

Long-Term Sustainability

Every three years, the Office of the Chief Actuary of Canada conducts an independent review of the sustainability of the CPP over the next 75 years. In the most recent triennial review published in December 2019, the Chief Actuary reaffirmed that, as at December 31, 2018, both the base and additional CPP continue to be sustainable over the 75-year projection period at the legislated contribution rates.

The Chief Actuary’s projections are based on the assumption that, over the 75 years following 2018, the base CPP investments will earn an average annual 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 investments will earn an average annual real rate of return of 3.38%.

The Fund, combining both the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net real returns of 8.8% and 8.0%, respectively.

Diversified Asset Mix

Operational Highlights:

Corporate developments

• Hosted 10 public meetings, one for each of the nine provinces that participate in the CPP and one meeting for the three territories, to inform Canadians about the Fund’s financial performance and our investment strategy.

• Published the 2020 annual Report on Sustainable Investing, which outlines CPP Investments’ approach to environmental, social and governance factors. The report shows that our investments in global renewable energy companies more than doubled to $6.6 billion in the one-year period of the report.

• Thinking Ahead, the thought leadership lab at CPP Investments, issued research on How COVID-19 is shaping the landscape for long-term investors. In this latest report, professionals at CPP Investments analyzed the breadth of change expected following the global pandemic, as well as emerging opportunities.

Executive announcements

• Appointed Ed Cass as CPP Investments’ first dedicated Chief Investment Officer (CIO) and Head of Total Fund Management. The CIO role was created to effectively address the anticipated size and scale of CPP Investments by 2025 and beyond. Total Fund Management comprises the former Total Portfolio Management department and the Balancing & Collateral team formerly residing in the Capital Markets and Factor Investing department. Ed was most recently Global Head of Real Assets.

• Appointed Deborah Orida as Senior Managing Director & Global Head of Real Assets, where she will be responsible for the global Real Assets program, which encompasses Energy & Resources, Infrastructure, Power & Renewables, Real Estate and Portfolio Value Creation. Deborah was most recently Senior Managing Director & Global Head of Active Equities.

Board announcements

• Dr. Heather Munroe-Blum was reappointed as Chairperson of the Board for a term of three years ending in October 2023. Dr. Munroe-Blum first became a Director of CPP Investments in 2010 and assumed the role of Chairperson in 2014. She also serves on the board of the Royal Bank of Canada and is Chairperson of the Gairdner Foundation. Dr. Munroe-Blum served as the Principal and Vice-Chancellor (President) of McGill University from 2003-2013.

• Mary Phibbs was reappointed to the Board of Directors for a term ending in May 2023. Ms. Phibbs was first appointed a CPP Investments Director in May 2017. She also serves as Chairperson of Virgin Money Unit Trust Managers Limited and is a non-executive Director of Morgan Stanley International Limited, Morgan Stanley & Co International plc and Morgan Stanley Bank International Limited. Ms. Phibbs previously had a 40-year, multidisciplinary career in international banking and finance, both in executive and non-executive roles.

• The National Association of Corporate Directors (NACD) named the CPP Investments Board of Directors as a winner of this year’s NACD NXT® awards. NACD NXT showcases boards that are leveraging innovation and diversity to elevate company performance, and this is the first time the recognition has been awarded to a Canada-based organization.

• Board Chairperson Heather Munroe-Blum was appointed to The Committee on the Future of Corporate Governance in Canada, a joint initiative established by TMX Group and the Institute of Corporate Directors to provide updated guidance on corporate governance for Toronto Stock Exchange-listed companies.

Bond issuance

• Completed two international debt offerings: GBP one-year term notes totalling £200 million and USD five-year term notes totalling US$1 billion. CPP Investments uses a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPP Investments flexibility to fund investments that may not match our contribution cycle. Net proceeds from the issuances will be used by CPP Investments for general corporate purposes.

Second-Quarter Investment Highlights:

Active Equities

• Invested an additional C$309 million in a rights offering by Cellnex Telecom S.A., a leading mobile-tower owner and operator based in Spain, holding total ownership in the company at 4.95%.

• Invested US$50 million in Perfect Day, Inc., an animal-free dairy maker, the first investment in our Climate Change Opportunities strategy.

Credit Investments

• Invested US$75 million in a senior secured term loan issued by Global Lending Services LLC, an auto financing solutions provider.

• Invested US$175 million in the first lien term loan, senior secured notes and second lien term loans of LogMeIn, Inc., a provider of remote working, collaboration and customer engagement software-as-a-service solutions.

• Committed to acquire up to US$1 billion of home improvement focused consumer loans from Service Finance Company, LLC, a sales finance business owned by ECN Capital Corp. Under the agreement, the purchases will be made through 2020 and 2021.

Private Equity

• Committed US$300 million in equity to the proposed acquisition of Virtusa Corporation (Virtusa) for an approximate 24% stake, alongside Baring Private Equity Asia. Virtusa is a global provider of a full spectrum of IT services.

• Increased our investment in Visma, the software-as-a-service provider headquartered in Norway, to an approximate 6% stake.

• Completed the acquisition of Galileo Global Education, a leading international provider of higher education and Europe’s largest higher education group, as part of a consortium of investors, with an investment of €550 million for a significant minority stake.

Real Assets

• Extended our partnership with GLP through the launch of the GLP Japan Income Fund (GLP JIF), the largest private open-ended logistics fund in Japan. The partnership with GLP was first established in 2011, and at the end of August 2020, CPP Investments successfully exited the investment in GLP JDV I, receiving approximately JPY 48 billion (C$590 million) of net proceeds. Following the disposition, CPP Investments recommitted JPY 25 billion (C$307 million) of the proceeds into the newly established GLP JIF.

• Expanded the existing multifamily joint venture alongside Cyrela Brazil Realty to include new partner, Greystar Real Estate Partners, LLC, the global leader in rental housing. Together, the joint venture partners will develop a portfolio of world-class rental housing assets across São Paulo and continue to target an investment of up to R$1 billion in combined equity. We will maintain majority interest in the joint venture.

Asset Dispositions:

• Sold our ownership interest in Zoox, a U.S. technology company focused on developing a fully integrated autonomous vehicle mobility solution, as part of Amazon.com, Inc.’s acquisition of the company. Our ownership interest was initially acquired in 2018.

• Sold our 45% stakes in AMLI 900, AMLI Lofts, AMLI Campion Trail, and AMLI Arts Center, multifamily properties in the U.S. Combined net proceeds from the sales were approximately US$224 million. Our ownership interests were initially acquired in 2012 and 2013.

• Exited the investment in luxury retailer Neiman Marcus Group LTD LLC through Chapter 11 proceedings in U.S. Bankruptcy Court and, as a result, did not realize any net proceeds from the investment. Along with our co-sponsor, we continue to be majority investors in Mytheresa, a high-growth, online ultra-luxury fashion retailer. Our ownership interest was initially acquired in 2013.

• Sold 10,000,000 shares in the capital of Battle North Gold Corporation, a Canadian gold mine developer, through the open markets for net proceeds of approximately C$19 million.

Transaction Highlights Following the Quarter:

• Entered into an agreement to invest an additional C$50 million, through a private placement of common shares, in Premium Brands Holdings Corporation, a specialty food manufacturing and differentiated food distribution businesses, to support its joint acquisition of Clearwater Seafoods Incorporated with a Mi’kmaq First Nations coalition.

• Invested an additional US$350 million in Viking Holdings Ltd, the parent company of Viking Cruises, alongside our co-investor TPG Capital. Viking Cruises is a leading provider of worldwide river and ocean cruises and this investment will support its continued development. The transaction is subject to customary closing conditions, including regulatory approvals.

• Invested in a combination of secondary offerings and market purchases of Avantor Inc., a leading global provider of products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries, holding total ownership in the company at 2.0% with a combined investment of US$285 million.

• Allocated an additional £300 million of equity to investment vehicles in the United Kingdom targeting the logistics sector, alongside Goodman Group and APG Asset Management N.V. The expansion follows the success of the Goodman U.K. Partnership established in 2015.

• Exited our 18% ownership stake in Advanced Disposal Services Inc., a solid waste services company in the U.S., through its acquisition by Waste Management Inc. Net proceeds from the sale were US$502 million. Our ownership stake was originally acquired in 2016.

• Converted and sold our convertible debt position in Bloom Energy, a manufacturer of solid oxide fuel cells in the U.S. Net proceeds from the sales and an April 2020 partial repayment from the company were approximately US$452 million. Our position was initially acquired in 2015, followed by two further investments in 2016 and 2017.

• Sold our 50% interest in Phase One of Nova, an office-led mixed-used development in London Victoria, U.K. Net proceeds from the sale are expected to be approximately C$720 million. Our ownership interest was initially acquired in 2012.

• Invested €200 million in Embracer Group, a Sweden-listed developer and publisher active in the global video game industry, for a 3% stake.

 About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2020, the Fund totalled $456.7 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

As you can read, the professionals at CPP Investments were very busy in Q2 Fiscal 2021 and I just highlighted the deals that caught my attention.

I'd like to make a few critical points because I was recently asked to produce a report comparing CPP Investments with OTPP, HOOPP and a couple of other smaller pensions.

In order to really appreciate and understand what CPP Investments is all about, you need to carefully read the Fiscal 2020 Annual Report cover to cover.

I know, it's long, it's tedious and a lot of you will get lost in the weeds but it's the only way to really appreciate the complexity and simplicity of this mega pension fund, the largest and most important in Canada.

When I tell my readers CPP Investments is one of the best pension funds in the world, it's because I base it on facts and truly appreciate everything they do across public and private markets, and how they assess risks across all their investment activities.

Some key points I want you all to understand but first take a look at CPP Investments' strategic portfolio asset class and geographic classifications and percentage weights:

Importantly, base CPP makes up the bulk of CPP Investments' total assets and it's a partially funded pension plan. In contrast, additional CPP assets are small but will grow much faster over the coming decades and they represent assets of a fully funded pension plan.

This is why the allocations in Public and Private equities are a lot larger in base CPP than additional CPP where the asset mix looks a lot more comparable to large Canadian peer pensions.

What else? CPP Investments' excess return since inception of active management (2006) when they started allocating more into private markets and doing it using the right approach has been significant and well above the minimum return required for the Plan's sustainability:

I keep harping on this point because you have naysayers who don't believe CPP is sustainable even when the independent Chief Actuary of Canada tell you it is going out 75 years and people who simply don't understand what people at CPP Investments are doing across public an private markets to add significant added value over the long run.

That brings me to my final point. Yes, it's true that the CPP Fund is doing well so far in Fiscal 2021 but that's too be expected given the bounce back in global equity markets since March lows.

CPP Investments and PSP Investments fiscal year end at the end of March, so I fully expect both these large Canadian pension funds are doing well in fiscal 2021 (CPP Investments more given its larger weighting in Public and Private Equities).

What's critical to understand is that both these large pensions tend to underperform their benchmarks when global equity markets are in a roaring bull market and outperform when they retrench.

[Note: CPP Investments Reference Portfolio (benchmark) is made up of 85% S&P Global Large and Mid Cap Index and 15% FTSE TMX Canada AllGovernments Nominal Bond Index for base CPP and the corresponding weights for additional CPP are 50/50).]

Over time, the excess return they generate over their benchmark is significant and is directly attributable to their investment strategies across public and private markets and the approach they take in private markets.

That's why you don't see me covering CPP Investments' quarterly returns every quarter, it's simply nice to know but not a long enough period to really matter.

The press release states: "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 10.5% and 9.6%, respectively. For the quarter, the Fund returned 5.0% net of all CPP Investments costs."

Always focus on long-term returns, not quarterly returns which move up and down like a yo-yo depending on how well or badly stocks are performing.

Alright, let me wrap it up here but before I do, yesterday, Mark Machin, President & Chief Executive Officer of CPP Investments, announced the appointment of Frank Ieraci as Senior Managing Director & Global Head of Active Equities, and a member of the Senior Management Team, effectively immediately:

In this role, Frank will lead the Active Equities department, which invests globally in public and soon-to be public companies, as well as securities focused on long-horizon structural changes which can include earlier-stage private companies. The department also includes CPP Investments’ Sustainable Investing group.

“Frank is well positioned to take on this senior leadership role, with his extensive understanding of the organization and its investment strategy gained from more than a decade with the Fund as well as his considerable investing experience. This promotion is a clear demonstration of the deep bench strength of talent that CPP Investments can draw from,” said Mr. Machin. “Under Frank’s leadership, the Active Equities department will continue to help advance our long-term investment strategy and champion data-driven research and advanced analytics to improve long-term performance.”

Frank was previously Managing Director, Head of Research and Portfolio Strategy at CPP Investments. In this role, Frank lead data-driven research efforts for Active Equities and was responsible for delivering alpha through active security selection driven by alternative data and advanced analytical techniques. He also oversaw Portfolio Strategy for Active Equities, including managing portfolio design and construction.

Frank has also held several other positions at CPP Investments, including Managing Director, Head of Active Fundamental Equities. In that role he was responsible for managing a concentrated portfolio of equity investments and leading a team of sector specialists. As a leader and mentor within the organization, Frank has championed inclusivity and well-being, including reducing the stigma of mental health challenges in the workplace.

Prior to joining CPP Investments in 2007, Frank held roles in finance and pension investing, based in Toronto. He holds a BA in Economics and Management Science from Ryerson University, an MA in Financial Economics from the University of Toronto and is a CFA charterholder.

On behalf of everyone reading this comment, I congratulate Frank Ieraci for this appointment and I'm sure he'll do a great job:

Below, a recent conversation with CPP Investments' CEO Mark Machin and Michael Katchenship, co-founder and CEO of Wealthsimple moderated by PWC's Anita McQuat and hosted by the Canadian Club Toronto. Watch this and listen carefully to what Dr. Mark Machin had to say, great insights as usual.

If you have any comments regarding this post, shoot me an email at LKolivakis@gmail.com.

A long and challenging list of geopolitical risks already existed before COVID-19 began shaking up the world order. US-China rivalry, weakened global institutions, fragmentation in the EU and a growing intertwining of climate and geopolitics to name a few.

For sure, a rebalanced global order and commitment to multilateralism could return with Biden’s presidency, while a vaccine for the virus will end its rampage of destructive volatility. But as geopolitical risks increasingly stalk developed markets, asset owners sifting through the noise for long-term trends believe a fragmented world is here to stay.

For example, the US election result won’t alter growing US-China tension and accelerating disengagement and de-globalisation trends.

“China remains a problem for the US; that hasn’t changed,” said a bleary-eyed Chris Ailman, speaking at CalSTRS’ board meeting the day after the US election and Biden’s emerging lead.

“The US and China will continue to move apart in a Biden presidency,” agreed David Ross, managing director of the capital markets group at Canada’s C$22 billion OPTrust who notes that China’s path to disengagement was made clear in its objectives for economic self-reliance set out in its 14th Five Year Plan (2021-2025) in October.

Disengagement has also been accelerated by other economies seeking a new self-sufficiency in the wake of COVID-19, said Ross.

“The shift to increased fiscal spending embraced by governments around the world as they sought to buffer their economies to the COVID-19 pandemic is generally inward looking and nationalistic. Overall, this should be expected to increase both geopolitical and economic volatility.”

Others note how the pandemic will also accelerate de-globalisation trends following its exposure of vulnerabilities in global supply chains.

“COVID-19 clearly revealed the implications of having heavy reliance on China as the manufacturer of the world. If there was ever a time to rethink supply chains and regulate changes for strategic and national security purposes, this is the time,” said Bruno Serfaty, head of dynamic asset allocation at the United Kingdom’s £67 billion USS Investment Management.

Tech divide

Disengagement between the US and China is manifesting in technology, as well as trade. US sanctions make working with China’s tech sector increasingly difficult for multinational companies. Elsewhere, OPTrust’s Ross warns disengagement and divergence could lead to investments becoming stranded due to legal or regulatory changes. It could leave pension funds with large and growing allocations to the engines of Chinese growth exposed.

Witness Canada’s C$420 billion CPP Investments, moving towards a 20 per cent allocation to the country which Geoffrey Rubin, senior managing director and chief investment strategist, recently described as “imperative” for both returns and diversification.

“China matters,” said Ailman, pointing to the Chinese companies like Tencent and Alibaba now in CalSTRS top 10 equity holdings. In recognition of the possible risks of holding Chinese assets, the pension fund is about to begin a six-month deep dive analysis.

“This is a risk we want to focus on,” said Ailman.

Economic divergence

The East-West trade and tech divide is also fuelling the emergence of separate economic spheres. Asia-centric and intra-Asian trade and investment flows are increasingly more significant than investment flows into Asia from Europe and the US.

Similarly, total Chinese investment in the US has fallen sharply. However it’s a trend asset owners’ believe could hold exciting opportunities – particularly around diversification.

“As long as the US continues to dominate the reserve currencies and China and its neighbours contribute the most to global growth, a well-balanced currency diversification approach should prove resilient to the emerging geopolitical tensions,” suggested Serfaty. “At USS we have recently reviewed our currency allocations with a view to improving diversification and increasing portfolio resilience at times of stress.”

New economic spheres could also manifest in manufacturing and production opening in alternative countries, he added.

“It could lead to more localisation of supply chains which may have a favourable impact on industrial production for some: for the Americas, some US states and Mexico could benefit, providing their business leaders prove capable of manufacturing as good quality products as their Chinese competitors. Similarly, some nations of Europe – Poland, Czech Republic – could sustain their industrial revival,” he said.

COVID-19 impact

Away from China-US relations, the other geopolitical risk top of mind is COVID-19. Of course, not all investors view the pandemic through a geopolitical lens.

“Geopolitical risks are still elevated, despite the US election outcome,” said Kasper Ahrndt Lorenzen, group CIO of PFA. “But when it comes to running investment portfolios, the COVID-19 development, and the policy reactions in particular, are more important.”

For others however, the pandemic has heightened risk.

OPTrust’s Ross is mindful that unprecedented government spending might soon unravel with geopolitical consequences.

“The market will eventually judge which countries have the credibility and balance sheet to get away with it and which don’t,” he says, predicting that the distinctions will appear in emerging markets first. Kurt Schacht, head of policy at the CFA Institute in Washington is also convinced the pandemic is morphing into significant geopolitical disruption.

“A clear and present danger is its impact on not just public health, but entire economies,” he said. “Predicting the course of biology, vaccines and human behaviour has fundamental investment analysts on their heels.”

Asset allocation

OPTrust’s Ross also believes the geopolitical climate could lead to higher inflation. Huge stimulus to counter COVID and reduced capacity due to lingering COVID issues or global trade friction, mixed with populism-fuelled higher labour and wages, has all the ingredients for stagflation.

“This is something we are spending a lot of time thinking about in our Risk Mitigation Portfolio,” he said. Inflation worries and the collapse in yields has already led the pension fund to reduce its allocation to nominal bonds – running counter to the traditional idea investors favour assets like cash, gold and government bonds in times of crisis.

Elsewhere, CalSTRS is also contemplating changes to its asset allocation in response to volatility. Citing a recent paper from the pension fund’s consultant Meketa advising how best to navigate uncertainty, Ailman said one idea includes a new opportunistic portfolio.

CalSTRS already has an innovation portfolio but abandoned an opportunistic allocation in the 1990s. Unconvinced if the giant fund could ever be nimble enough to be opportunistic, Ailman said his focus remains on diversification, actively managing risk and focusing on fees by pushing a collaborative manager model over expensive traditional partnerships.

Climate change

Investors also note a growing intertwining of geopolitical and climate risk, particularly since the pandemic (seemingly easier to solve by cooperation than climate change) has highlighted the challenges inherent in global cooperation.

“The lack of COVID 19 cooperation – perpetuated by many countries, both in the east and west alike – is a bad omen for other problems which are less knowable and less immediate,” said the head of a US corporate pension fund.

“The continued geopolitical shift away from global cooperation to national or regional approaches would pose direct risks to the coordinated efforts that are necessary to address climate change. We believe that the sustainability of the Plan and the planet are inextricably linked, and we are increasingly focussed on risks that climate change poses to our portfolio,” concluded OPTrusts’ Ross.

Geopolitical risk and the impact on portfolios will be a topic of discussion at the Fiduciary Investors Symposium online on December 8. For more information click here.

Great article, provides a lot of food for thought. 

First of all, I never met or spoken with David Ross, managing director of the capital markets group at OPTrust but I do appreciate someone who can discuss the bigger picture in a very clear and cogent manner.

Of course, some of his views here do not jive with those of his boss, James Davis, CIO at OPTrust.

I recently chatted with James and Peter Lindley, OPTrust's CEO, on their total portfolio approach, a topic which I'll come back to after Mihail Garchev and I finish our series on integrated Total Portfolio Management (Part 5 is coming up tomorrow but since it's long, we decided to cut it into three posts).

Anyway, when James Davis spoke with me, we both agreed that secular stagnation is here to stay and we have yet to see to the secular lows on long bond yields.

I referred to an older (2017) comment of mine on deflation coming to America where I discussed the (then) seven structural factors that led me to believe we are headed for a prolonged period of debt deflation:

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

Interestingly, this week Amazon launched its online pharmacy:

Amazon Pharmacy allows U.S. customers to order prescription medications for home delivery, including free delivery for Amazon Prime members. https://t.co/4hG4FOuHZq

— CNBC (@CNBC) November 18, 2020

This is just another example of massive disruption occurring across all sectors, including healthcare. 

Power is being concentrated in the hands of fewer and fewer mega tech companies or mega retailers and this competition among monopsonies is actually benefiting consumers, for now.

But what is good for consumers isn't necessarily good for the overall economy as inequality rises to unprecedented levels. 

Importantly, the pandemic has only accelerated the structural trends I warned of back in 2017.

And a Biden administration will not change this.

In fact, while Larry Summers' tax advice for Joe Biden is to collect on the $7 trillion owed by 'the richest taxpayers, my advice is far simpler: levy a special "pandemic tax" on the S&P 500 companies that benefited the most from the pandemic and use the proceeds to help small & medium sized businesses and their employees that were impacted the most.

Of course, there is no appetite whatsoever for any taxes in the United States, even ones that make imminent sense.

Instead, the Power Elite keeps repeating the same mistakes. After every crisis, Uncle Fed comes to the rescue, lowering rates and now digitally printing trillions to effectively bail out Wall Street speculators, Big Tech moguls and corporate titans who benefit the most from all this "digital printing".

Oh sure, a few stimulus packages here and there to make sure the masses don't starve to death but to the victor go the spoils and let's not kid ourselves, the pandemic has been a boon to Big tech moguls, corporate leaders and Wall Street speculators.

That's why while some worry about a fragmented world, I worry a lot more about a fragmented and increasingly divided society and its effects not only on markets but on our civil society:

For The First Time, Wall Street Admits That "Civil Unrest" Could Crash Markets | Zero Hedge https://t.co/RC1hdEVQHX

— Leo Kolivakis (@PensionPulse) November 18, 2020

Here we go again: Panic buyers across U.S. empty shelves of toilet paper, food and disinfectant as 40 states see record daily increases in cases and 20 states report all-time highs in deaths
via https://t.co/vyiNBXFspXhttps://t.co/mfN7rHmbEj

— Jon Najarian (@jonnajarian) November 17, 2020

Jon Najarian's tweet prompted me to respond: "We live in a society of animals who love to hoard, no consideration whatsoever for their common citizens. Breaks my heart watching seniors trying to shop at stores as animals buy up everything they can."

By the way, I don't think there will be civil unrest, at least I hope not, but we can't dismiss it. Trump is riling up his base one last time and who knows what he's cooking up now that the courts have slammed his chances of contesting the election results and state election officials are moving to final certification of the results in the coming days:

Pres. Trump's bid for a possible Supreme Court election intervention has yet to materialize as state election officials move toward final certification of results in the next few days. https://t.co/mPoVGuUBSj

— ABC News (@ABC) November 18, 2020

The United States remains more divided than ever. Trump will more than likely be back in four years, and that's why I don't see any major policy shifts down south even if the Democrats take over the Senate provided they win the Georgia runoff races in early January.

Getting back to the comment above, both Chris Ailman and David Ross warned of deteriorating US-China relations and Ross went a step further, warning that disengagement and divergence could lead to investments becoming stranded due to legal or regulatory changes. This could leave pension funds with large and growing allocations to the engines of Chinese growth exposed.

Recall, in late October, the Ontario Chamber of Commerce (OCC) brought together the heads of three major Canadian pensions to discuss the future of institutional investing in Canada. The panelists included Blake Hutcheson, President and Chief Executive Officer, OMERS, Jo Taylor, President and Chief Executive Officer, Ontario Teachers’ Pension Plan and Jeff Wendling, President and Chief Executive Officer, Healthcare of Ontario Pension Plan.

I covered it here and it is now publicly available fore everyone to watch on HOOPP's website here. 

At that discussion, the three CEOs covered "The China Factor" and here is what I noted:

The conversation then got interesting because they talked about direct investing in China. 

Jo Taylor brought up an great point stating: "It's really easy deploying capital in China but really challenging extracting it. The rule of law isn't there, the regime can basically take actions which impact your investments overnight."

He said OTPP is doing direct investments there along with local partners, but they're also looking at Asia Pacific more broadly as other countries will benefit from China's growth (they recently opened up their Singapore office). 

He also said China impacts companies here, like Apple, citing increased nationalism there and how it can impact these giant tech companies in North America.

Blake Hutcheson agreed, "you can't ignore China but it's tricky". OMERS is currently invested 3% in Asia and looking to go to 10% but it's a "long game, a relationship game".

Jeff Wendling said HOOPP has 2-3% of its assets in emerging markets and it will increase them as growth will be there but they will do so mostly through public markets.

Still, HOOPP did a private equity deal in China and will look at all private market deals there if they make good sense and if they have the right local partners.

It's clear China is an important factor in Asia Pacific and it has ripple effects all over the world. 

Every major Canadian pension that has done deals in China's private markets has done so using local partners and this will not change going forward.

CPP Investments' Chief Investment Strategist Geoff Rubin is right, it is " imperative"to invest in China for returns and diversification, but every large institutional investor is thinking the same thing: China is a communist country run by the Chinese Communist Party and that makes Western investors very nervous.

Now, let me just state flat out, in my opinion, China needs the US (and the West) now more than ever and they wouldn't dare nationalize a major investment from a foreign investor, that will send the country back to the Dark Ages.

I'm not saying it isn't possible, it sure is, but highly unlikely. 

Why? While China's rule of law is questionable, we all need to remember certain economic laws.

First and foremost, China runs a massive current account surplus exporting goods all over the world and the US runs a capital account surplus, accepting foreign investments into Wall Street and other areas.

Got that? China's current account surplus necessarily means a US current account deficit and a capital account surplus. That will not change over the next decade(s).

The Chinese exert immense power, especially over their regional neighbors where they just signed another favorable trade deal, but in global affairs, the United States still dominates the world, including China.

There's a mutually symbiotic relationship there and you're seeing private equity giants moving aggressively to invest more there. That tells me the power elite are very comfortable with the balance of power the US still exerts over China. 

Again, I'm not saying China-US relations are perfect and cannot deteriorate more under a Biden administration but I take any doomsday scenario of China nationalizing investments foreigner invested in with a shaker of salt. That's just a dumb long-term move and the Chinese are always thinking ten steps ahead. 

Lastly, as far as climate change, I agree with the person who stated this in the article above:

“The lack of COVID 19 cooperation – perpetuated by many countries, both in the east and west alike – is a bad omen for other problems which are less knowable and less immediate.”

We are not doing enough to address climate change and I'm not one who believes the Paris Accord will save our planet.

Moreover, while the Quebec Government is looking to eliminate gas vehicles by 2035, I remain highly skeptical:

Goodbye, gas guzzlers: ban on sale of gas vehicles in Quebec by 2035 expected to be announced Monday https://t.co/MngYE7wDAepic.twitter.com/1UBxua2e7D

— CTV Montreal (@CTVMontreal) November 15, 2020

Importantly, it simply can't be done, not in 15 years and most likely not in 25 years as Hydro Quebec will tell you our electric grid can't handle it, not to mention you need a lot of coal to generate all this electricity. 

What I see going on right now is policies based on "ESG" fervor, and unfortunately it's seeping into our pension investments.

Everyone is touting "wind farms" and "solar farms" but the real solution to addressing climate change is building more nuclear power plants.

Of course, that takes a long time but if pensions are truly long term investors, they'd team up with large engineering companies and build nuclear power plants and generate great long term returns.

If done right, it's safe (never mind Chenobyl and Fukushima, the engineers screwed up royally!) and will deliver power for decades and significantly reduce carbon emissions.

But in order for this to happen, you need the political will to be there and you need everyone to be on board.

Anyway, those are my thoughts on the fragmented world we live in. If you have anything to add, feel free to email me at LKolivakis@gmail.com.

Below, in this episode episode of Talks At GS, CalSTRS Chief Investment Officer Chris Ailman discusses leading the country’s second largest public pension fund through the pandemic, his long-term outlook on investing, and how he has incorporated ESG into his investing strategy.

Great discussion, take the time to listen to Chris Ailman and also remember to watch the discussion between Jeff Wendling, Jo Taylor and Blake Hutcheson here (scroll to the end and click the link).

Lastly, Jeff Gundlach was recently interviewed where he shared his thoughts on markets, stating volatility will persist in the coming years and investors are ill-prepared for a "fat-tailed event". 

Interesting comments, not sure why he's still dubbed "the bond king" given his fund is underperforming Dan Ivascyn's PIMCO fund for years and I don't agree with his call that rates are artificially low but he always makes me think. Right or wrong, it is always worth listening to Gundlach. 

I actually like his comments on work productivity and shifts in housing market which are "disinflationary for wages"(so bond friendly and supportive of lower long bond yields) but I disagree with his bearish views on the greenback, he's got that all wrong (look at what the ECB is doing!!).

Please take the time to read Mihail's synopsis below on case studies followed by my comments and a clip where he delves deeply into today's topic (added emphasis is mine):

For those of you who are watching the series for the first time, this is a quick look at the topics we are covering in this seven-episode series. In the first three episodes, we talked about why the Canadian pension funds are increasingly turning their focus toward Total Fund Management ("TFM"). At the core of this emerging trend is the desire further to increase the Canadian pension model's efficiency and effectiveness and sustain the benefits of the previous economies of scale by introducing economies of scope – a top-down efficiency based on an integrated TFM approach.

This TFM approach reflects the need for cohesive management of the total portfolio activities, including short- and medium-term capital and risk allocation, and other total portfolio activities such as liquidity, leverage, currency, and balance sheet management. The TFM approach is also supported by the organizations' strategic plans and proper organizational structure.

We also discussed some fundamental investment beliefs which support the long-term investment thesis of TFM by uncovering the link between managing the short term toward the long-term pension sustainability outcomes. These investment beliefs necessitate rethinking the portfolio management framework and process toward developing an outcome-oriented portfolio management approach. We discussed the key elements of this approach and its implementation in Episode 4.

We are already at Episode 5, where we connect theory and practice and illustrate the TFM process and framework using 11 real-life case studies.

Next, Episode 6 will get even more real and discuss what is required to move from a process and a framework to a capability. The investment process, methodology, process, and framework meet technology and organizational structure. We will conclude the series with Episode 7, where we will discuss the role of TFM as part of the next stage of development of the Canadian pension model. With this episode, we already have almost 500 slides and close to six hours of presentation material.

Key takeaways from Episode 4 last week

Before we proceed with the topics today, let us summarize the key takeaways from Episode 4, which provided the TFM framework and process.The case studies today are based on all the theory in Episode 4 and the conclusions from the previous episodes.

First, we confirmed the difference between TFM and other approaches, such as strategic asset allocation ("SAA"), tactical asset allocation ("TAA"), and broad diversification approaches, such as "All-Weather."A significant differentiation is the integrated management of the short, medium and long terms, which requires a multi-period path-dependent asset allocation. As such, TFM critically relies on the ability to formulate expected returns, different time horizons, or what we called the term structure of expected returns ("TSER"). At its core, the TFM process is about the ability to formulate absolute and relative expected returns at different time horizons as part of a consistent and coherent macro, market, and thematic framework. These expected returns then become a critical element for a multitude of total portfolio decisions, such as rebalancing, strategic tilting, risk mitigation, leverage, and liquidity management.

The ability to evaluate the total portfolio exposures, given the expected returns and the market conditions, and diagnose the portfolio allows for making essential total fund ("TF") decisions. TF decision-making, however, requires a structured and disciplined, data-driven process.

Episode 5 case studies

Episode 5 brings together the framework, process and conclusions from the episodes so far, and real-life examples of how to use the theory of TFM for practical TFM decisions at the investment committee ("IC") or by the chief investment officers ("CIOs").

Thought-leadership, frameworks, processes, they all mean little if the organization cannot implement them. As such, this episode is essential because it is the nexus of thought-leadership and implementation. It bridges what we learned about TFM with what we could do with TFM. This is a needed step of linking theory with practice and a prerequisite for moving toward a functional capability (combining methodology, process, technology, and organizational resources).

This episode is very important for me, as it is not only about the value I can personally bring to the community as a thought-leader but also based on my experience of successfully implementing many of the TFM concepts in practice at two of the large Canadian pension funds over the last 10-15 years.

This brings us to the list of case studies we are going to look at in Episode 5. We have a total of 11 case studies, which we will follow through in three installments of Episode 5 starting today and two more parts next week. The wealth of material is inspired by the many professional experiences I have had and the number of comments, questions and suggestions I received throughout this series (thank you for that!).

Below is a quick snapshot of all the case studies in Episode 5:

Case Study 1—The Earth is (not) flat: The Term Structure of Expected Returns over time

Our first case study is a carryover from the discussion we had in the last episode about the difference between TFM and SAA.

One of the differences between TFM and SAA is the TSER. In some of the slides in the previous episode, we were visualizing this difference as the SAA flat expected returns curve (hence, the title of the episode and the case study, with a slight wink to the irrationality of the flat earth theory), which reflects the assumption of average returns over the investment horizon. By contrast, we depicted the TSER for TFM similar to the stylized representation of the typical yield curve in the fixed income markets but representing expected return over the maturity horizons.

In reality, the SAA expected returns are not a flat line but slowly move in a step-wise or moving average fashion while the TFM TSER fluctuates around the SAA line.

Using data since 1980, we built an example of the S&P500 TSER for every quarter since 1980 and compared these TSERs to the typical average expected return assumed for S&P500 in SAA studies. The figure below illustrates the study's set-up (I like this version but did it after hours, so it is not in the presentation).

Any point on the blue line on the chart above represents the average of each of the expected returns at different maturities on the TSER estimated at that particular time. These are all real calculations, by the way, with no look-ahead bias. For the SAA, the equivalent is just a flat term structure—just one average expected return applied to all the maturities.

This means that if there is predictive informational content in the TSER that could be used in a portfolio context, then using the blue line for portfolio construction would be superior just to use the average SAA approach. This predictive informational content needs not to be a crystal ball. It is more about tipping the odds by capturing direction, possibly magnitude, and, more importantly, relative returns between assets. Remember, in the figure above, this is just one asset. In the case of one asset, there is only the time-series predictive informational content because it is about the absolute expected returns and their term structure. There is no other asset to compare with. In the case of two or more assets, we now have the time-series for each asset on their own and the cross-sectional (relative) aspect. At each point in time, we can also express the relative expected returns between each of these assets. These points would become essential for Case Study 3, where we will look into whether there is sufficient informational content in the TSER.

You have probably noticed by now that the TSERs depicted in the figure above are not uniform—they have different levels, slopes, curvatures, and twists. This is because different maturities might have higher or lower expected returns at any point in time. The usual depiction of a yield curve is upward sloping, which assumes that the shorter-term returns are lower than the longer-term returns. And while for yield curves, this is generally true, this may not be the case for other assets. As you can see, these curves vary a lot. It is not by coincidence that at market peaks, the TSER inverts, as you can see in 1982, 1994, and 2008, for example.

As such, the second part of Case Study 1 is to look at how these TSERs move over time. This example is captured in the figure below. You can see these TSERs shift significantly across time. This shifting across time provides the informational content for both the absolute (time-series) and relative (cross-sectional) use of the TSER.

Case Study 2—How insights are born: Opening the "white box" of how Expected Returns are born

We saw the expected returns in action, but what is the process behind determining the TSER? This is the topic of Case Study 2.

In Episode 4, we discussed the TFM framework, which is based on the ability to construct absolute and relative expected returns at different horizons based on macro, market and thematic insights. We also illustrated the additional use of risk matrices, which define short- and medium-term market and economic conditions.

The question then is, what is the general process to arrive at the current structure of expected returns? Is it some black box with esoteric tools inside, or is it a tried and time-tested approach? The former proposition creates the excitement of the mysterious, while the latter, the skepticism that everybody must have done this already. In the presentation, we bring the point that the value is in the amount and type of information (both traditional and new sources of data) and how this information is interpreted and transformed, in addition to applying this information to a sufficient breadth of asset classes (not only, types, but geographies, sectors, capitalization, capital structure, and factor exposures).

The second lever is the existence of a process itself, not just any process, but an integrated, structured and disciplined one. Indeed, many of the approaches (minus the esoteric machine learning and AI) are already used. Still, in many cases, especially at buy-side institutional investors, these approaches are used here and there in various portfolios, maybe asset classes, but rarely, if at all in at the total portfolio level, let alone in an integrated, structured and disciplined manner. Have such a process and framework first, be confident that it possesses informational content that could be transformed into economically meaningful excess returns, even if it is not that spectacular.

Why? Because you have the economies of scope on your side. It is one thing to have a single strategy and try to extract value from it. It is a different circumstance where you have the multiplicative network effect of TFM impacting asset allocation directly and portfolio maintenance (e.g. rebalancing, FX hedging) and other activities such as liquidity, leverage, or risk management, for example. Because it is not only the multiplicative effect of the excess returns but also the opposite effect on the hidden costs that come with the lack of an integrated top-down process, a topic we discussed at length in Episode 1 where we talked about TFM and the economies of scope bringing second-order efficiencies to the restore the initial economies of scale which might be challenged at the Canadian pension funds.

In this synopsis, I will not go through describing the process of arriving at the expected returns and the TSER, or in other words, opening the proverbial "white box." You have to watch the presentation. The other reason why you need to watch the presentation is that you would see there for the first time a real-life implementation of the expected returns, the term structure, and the short- and medium-term risk matrices across more than 240 markets, and provides further insights of how the matrices are constructed and how to interpret them. This information is the basis for understanding what comes in the case studies next week.

What is essential, however, is to illustrate once again what is the TFM core capability. If you do it right, it will allow you to do many other things more efficiently. The figure below illustrates it. If you have watched all the episodes by now, these four elements would be (painfully) familiar.

The last point in Case Study 2 brings together the notion of the economies of scope and the core TFM capability above in the context of none other than Amazon.

Amazon did one (or two) things right (technology, and client outcome focus, and a competitive internal marketplace), which allowed it to unleash the economies of scope on the world (for better or worse). Put a placeholder on the "competitive internal marketplace – we will revisit this concept when discussing the Canadian pension model 2.0.

In Amazon's case, you can think of it as "efficiencies formed by variety, not volume" (the latter concept being "economies of scale"). Just replace Amazon's "core capability" with the TFM ones, and who knows, maybe defence contracting is not out of reach! P.S. Notice the warehouse setting and the real books – challenging to imagine the amount of progress!

Case Study 3— The proverbial "R-Squared" question: What is the Expected Returns value?

So far, we saw the TSER in action. We opened up the "white box" of how the insights about the expected returns are born and discussed their importance as the core capability of TFM.

The next one is the proverbial "R-squared" question: What is the value of the expected returns? We can formulate expected returns, we can show them, but what is the value of these expected returns to make TF decisions? I will bring again the discussion from Case Study 1 where we established that "if there is a predictive informational content in the TSER which could be used in a portfolio context, then using the blue line for portfolio construction would be superior just to use the average SAA approach. This predictive informational content needs not to be a crystal ball. It is more about tipping the odds by capturing direction, possibly magnitude, and more importantly, relative returns between assets."

In this case study, we are trying to answer whether there is any informational content in the expected returns and whether we can monetize this informational content. To test this, one needs to use a portfolio approach. If using the information in the expected returns, we can form profitable portfolios, with minimum optimization or back-fitting), then this means that we could broadly use these expected returns in various investment-related processes. Of course, the processes themselves need to be well designed as well.

Therefore, in Case Study 3, we evaluate four tests. I will briefly describe them and provide you with the key takeaways. You would need to watch the presentation for all the details and the (many) exciting aspects.

The first test is based on the information in the first case study where we constructed a TSER for each quarter since 1980 and observed how the maturity points on the curve frequently crossed each other over time (this is the second figure in this post). If one has this information, then one can perform a (rather blunt) test of "freezing" each TSER at a particular point in time and observing whether, or how well, the 1,2,3, …9, 10-year expected returns on this particular TSER forecast the subsequent actual 1,2,3, …9, 10-year returns. We did precisely this. This test answers the proverbial "R-squared" question as it shows an r-squared statistics of 0.5 to 0.9 (starting at the 2-year through the 10-year point).

These results are indeed very reassuring, but an extra step needs to be taken and perform portfolio-based tests. You would recall again from Case Study 1, the discussion about the absolute (time-series) and relative (cross-sectional) expected returns. Without going into details (watch the presentation!), we tested two long-short portfolios (and other long-only versions as well) on 43 equity markets (23 developed and 20 emerging) using the underlying signals for the TSER. In these two tests, we did not separate the signals by the predictive horizon (e.g. into short- or medium-term ones). We did this in a separate test, again, with simple portfolios of "long high rating, short low rating" set up across short- and medium-term horizon.

We evaluated all these tests based on the following criteria:

• Performance: Economically meaningful excess returns
• Synergy: Would combining S-T and M-T ratings work better?
• Signal Decay: Optimal horizon and informational advantage decay
• Uniqueness: How different is this from other known strategies
• Impact of Constraints: Long-Short vs. Long-Only Tilted Performance
• Risk and Efficiency: Sharpe, Sortino, Information Ratio, Drawdowns, Turnover, Signal Attrition
• Crisis and Event Performance: 14 significant events studied

Following the battery of portfolio-based tests, it appears that the signals from the macro/market/thematic framework that are used to determine the TSER show informational content and the ability to transform this informational content into economically meaningful outperformance on an absolute and risk-adjusted basis for investment management purposes.

Testing against staple factor strategies shows that these signals do not represent any form of factor investing in disguise (AQR Value, Momentum, and Low Vol explain 1%-10% of the performance).

The outcomes are most similar to global macro sources of return (the HFRI Global Macro Hedge Fund Index explains 50%-60% and underperforms) with a slightly negative beta to the market (-1% to -10%). This is rather important because this is an expensive capability to have (can be accessed only via hedge funds, of course, after paying the fees) and cannot be cheaply replicated or purchased like the factor products, for example.

Second, in the context of risk mitigation (we will talk more about it in Case Study 11), there is a need to substitute somehow or enhance the weakened diversification properties of bonds due to low yields, the prevalence of fiscal over the monetary policy, and extreme valuations (among other things). For this reason, there is an emerging trend of investors to explore global macro processes and products as imperfect and expensive substitutes of bonds. If there were an internal capability, it might still be imperfect, but certainly cheaper and much nimbler.

Testing against control universes (46 Global macro and TAA live funds from Morningstar and 37 popular "paper" strategies published in the Journal of Portfolio Management and similar industry publications) show consistent close to first quartile performance.

The time-series and cross-sectional (or absolute and relative) return profiles compared are quite different, implying that the source of return from cross-sectional investing is different from that of the time-series return, and both absolute and relative expected return signals add value.

Using both short- and medium-term signals combined, especially if directionally aligned, leads to superior results. This confirms the importance of using short- and medium-term risk matrices (market and macro conditions in the investment process).

These signals work in various market conditions but are best at identifying vulnerable markets. They benefit most from short positions and, therefore, are most efficient in an overlay set-up. The long-short strategies have definitive risk-mitigation characteristics. This is important if to further use in dedicated risk-mitigation processes.

Finally, the TSER signals allow for identifying "priced-in" markets – test results show that the best/worst performance is not at the extremes, but just before that.

As such, these tests provide additional confirmation that the signals from the macro/market/thematic framework that are used to determine the TSER could be further used for a multitude of total portfolio decisions, such as rebalancing, strategic tilting, risk mitigation, leverage, and liquidity management.

Case Study 4— The Path of Returns Decisions: The quickest road to Rome

In the Episode 4 summary at the beginning of this post, we confirmed the difference between TFM and other approaches, such as SAA, TAA and broad diversification approaches, such as "All-Weather." In addition to the TSER aspect, a critical differentiation was discussed so far, the integrated management of the short, medium and long terms, which requires a multi-period path-dependent asset allocation. This path-dependence was demonstrated in Case Study 1 (the ever-changing TSER through time). This means that asset allocation decisions depend not only on what we know about (or what we think about) today versus tomorrow, or about the future "on average" (like SAA), but what we know with certain informational content about all the different periods until we reach the final objective in the future. This gets back to the fundamental investment belief of TFM we formulated in Episode 3 that the long-term is a series of short terms in the presence of liabilities.

Again, in Episode 3, we started this analogy with Rome and the daily commute dilemma, and we introduced the notion that what matters for long-term investing is not about long or short, but it is about fast and safe. As such, it is not about the distance, but the fastest way to arrive at the final destination. And this was similar to the daily commute dilemma—although the distance could be shorter, it might take a long time because the traffic is congested (and the traffic being the equivalence of low expected returns, so it would take you much longer to get to the final objective). Time is a function of distance and speed, and speed itself depends on gravity and friction. And you can think of gravity as the expected return and friction transaction cost. We hinted about all this in the physics experiment of competing sliding objects in Episode 3.

The question then becomes the shortest time to arrive at the end goal of terminal wealth (the proverbial "Rome") given the structure of expected returns.

The purpose of the case study is to illustrate if one has the term structure for two assets, equities and bonds, how to think about this allocation decision borrowing from the computer and mathematical programming.

It is a simple example but requires a bit of focused attention to get the idea. You would need to watch the presentation for the detailed explanation. However, the next figure provides you with the (simple) answer – follow the yellow path, and invest today in equities to get faster to Rome. If we only follow what we know about tomorrow, but not about the day after tomorrow and thereon, we would have taken a different and suboptimal path. But more about it in the presentation.

In closing, these are the key takeaways from today's episode:

•  The core capability of the TFM process related to the Term Structure of Expected Returns ("TSER") is central to managing and making decisions on most of the Total Fund processes (e.g. asset allocation, efficient portfolio maintenance, as well as inform decisions around the balance sheet, liquidity, and leverage, among others) 
• Many of these decisions are critically dependent on such a core capability, as decisions, but also as sound risk management, and creating effectiveness and efficiency by economies of scope 
• The core capability requires a data-driven, structured, disciplined, and transparent process
• Such a process further leads to practical informational content in the TSER and the related conclusions about the macro and market environment to enhance the outcomes of the investment process 

This concludes Episode 5 for today. The next part of Episode 5 next Thursday will continue with the case studies. We will talk about Case Studies 5 and 6—Rebalancing Decisions: The Nexus of Multitude of TFM Decisions and Balance Sheet Decisions: Ensuring optimal adequate resources for current operations and financing future growth

***  

Let me begin by thanking Mihail for delivering another great comment and staying up all night to finish the video clip below (next time, get some sleep first!).

If you have not done so yet, please review all three previous parts of this series:

• Introduction to Integrated Total Fund Management: Part 1
• Total Fund Management Part 2: What Nobody Told You About Long-Term Investing 
• Total Fund Management Part 3: When All Roads Lead to Rome
• Total Fund Management Part 4: How to Develop a TFM Framework & Process

As stated at the top, we decided to break Episode 5 into three parts because there's a lot to cover and it's the meat and potatoes of our seven part series, where the rubber meets the road.

As Mihail states, "thought leadership, frameworks, process all mean little if one cannot implement" and this is why this episode is very important, "it's the nexus of thought leadership and implementation, it bridges and connects what we learned about TFM with what we can do with TFM".

And keep in mind, Mihail has great experience implementing TFM and as you'll see below, he shares quite a lot (perhaps too much).

I cannot add much to the analysis below since some of the concepts are way above my head, but he goes over everything in detail and it is extremely well explained. 

Clearly, the Term Structure of Expected Returns ("TSER") is central to managing and making decisions on most of the Total Fund processes (e.g. asset allocation, efficient portfolio maintenance, as well as inform decisions around the balance sheet, liquidity, and leverage, among others) .

The TSER should not be confused with the flat expected return governing strategic asset allocation (SAA), it is more meaningful and powerful and when used properly, it can no tonly unlock economies of scope, it can significantly enhance risk management at a total fund level. 

Anyway, please take the time to watch Episode 5 below, Mihail did a great job explaining the concepts above.

I recommend you watch it on YouTube here and click "show more" where you will see "chapters and timeline" to fast forward to different sections of the presentation:

Below, Episode 5 of the seven episode series "Introduction to Integrated Total Fund Management" presented to you by Mihail Garchev, former VP and Head of Total Fund Management of BCI. 

Great job, thank you Mihail!

Before I proceed, three weeks ago, Benjamin Bain and Robert Schmidt of Blain of Bloomberg reported that hedge funds' shot at keeping stock investments secret fades:

U.S. regulators are shelving a controversial plan to allow most hedge funds to keep their stock investments secret after public companies and other critics blasted the proposal as a major blow to market transparency, said people familiar with the matter.

Under the rule change the Securities and Exchange Commission was considering, only fund managers who owned at least $3.5 billion in equities would have had to publicly report their holdings, a dramatic increase from the current threshold of $100 million. While the SEC hasn’t publicly announced its decision to scrap the overhaul, some within the agency have been notified it’s dead, said the people who asked not to be named in discussing internal communications.

At issue are 13F filings, reports in which asset managers must disclose their investments in U.S. shares every three months. Even though the filings can be delayed by as many as 45 days after the end of each quarter, they are still closely tracked by companies, Wall Street analysts and rival money managers as the most revealing peak into funds’ stock portfolios.

When the SEC issued its proposal in July, the agency said it wanted to reduce compliance burdens on smaller money managers while ensuring that it could still monitor the equity investments of the biggest fund companies. But the plan to raise the threshold to $3.5 billion quickly became a lightning rod for attacks.

Corporate titans complained in comment letters that the revamp would make it much harder to figure out who owns their companies’ stock and enable investors to covertly build up equity stakes over time -- potentially making it harder to fend off activist campaigns. As opposition mounted, even the two main lobbying groups for hedge funds questioned whether the SEC had overestimated how much fund managers would save in compliance costs if many no longer had to file 13Fs.

“This shows the value of the public comment process,” said James Angel, a finance professor at Georgetown University who wrote a letter to the SEC opposing the rule change. “More people should monitor what our regulators are proposing and submit comments. The SEC is a political agency, and they do pay attention to public opinion.”

Inside the SEC, senior officials were surprised by the level of opposition, said the people. An SEC spokeswoman declined to comment on whether the proposal has been abandoned. In a statement, the regulator said it still believes that the $100 million trigger -- a level that hasn’t been altered in four decades -- needs to be revised.

“It remains clear that the current threshold is outdated,” the agency said. “The comments received illustrate that the form is being used in ways that were not originally anticipated when the form was adopted. We are focused on examining these important issues before we move forward with determining the appropriate threshold.”

Goldman Sachs Group Inc. analysts did a tally of responses that the SEC received when the agency’s public comment deadline passed this month and the results were overwhelming: The regulator received 2,238 letters opposing the changes to 13F requirements and just 24 in favor. The Goldman analysts also predicted that the SEC would withdraw its plan.

In its proposal, the SEC said that almost 90% of fund managers would no longer have to file 13Fs if the change was approved. But more than 90% of U.S. stock holdings that are currently reported would still be publicly disclosed, the agency said. That’s because funds with $3.5 billion of equities own the vast majority of stocks.

The SEC’s proposal would have allowed some of the biggest names in investing to keep their stock holdings private, including John Paulson, Stanley Druckenmiller, George Soros and David Einhorn.

The SEC is now closely examining several topics raised in the comment letters, according to two other people who asked not to be named. The issues include whether corporations have enough information about who their shareholders are and whether market participants realize that 13F filings don’t reveal all the ways that funds might invest in companies, the people said. For instance, some derivative transactions aren’t disclosed.

Not exactly sure what that SEC official meant with “it remains clear that the current threshold is outdated,” but I'm very happy the SEC abandoned this proposal and after reading this comment, you will be too.

I believe more transparency is better for financial markets and I agree with SEC chair Jay Clayton who in a recent interview with CNBC’s Bob Pisani, admitted that the commission may need to take a look at issuers’ reliance on 13Fs to determine who their shareholders are.

Hundreds of issuers co-signed letters filed by NIRI national, local NIRI chapters, Nasdaq and the NYSE, as well as 33 companies that submitted stand-alone letters, all expressing concern about how the proposal would reduce visibility into who holds stock.

Clayton said last week that if 13F filings are ‘the only way we have to effectively identify who our shareholders are, that’s a problem. If we’re using 45-day trailing filings of a select group of people to help companies figure out who their shareholders are in the day of electronic communication, that’s something we’ve got to address.’

He added that this may require the SEC to take a look at the commission’s rules around objecting beneficial owners (OBOs) and non-objecting beneficial owners (NOBOs). These rules were introduced in the 1980s and govern how issuers interact with their investors through brokerages.

Alright, keep this in mind as you still get to enjoy a sneak peek into the portfolios of the world's richest and best known fund managers, with the customary 45-day lag. 

Everyone is an "expert" on 13F filings but only yours truly brings you quarterly comments where you can literally click on links and go straight to the top holdings of each fund to see firsthand what your favorite superstar fund managers bought and sold last quarter.

A few things to keep in mind:

• The data is lagged by 45 days and it's highly likely some funds added to positions or sold out of positions since the end of Q3. Most quant funds churn their entire portfolio often, other activist funds very rarely, and others are mixed.
  
• Markets are very volatile, now more than ever, because interest rates are at historic lows and geopolitical risks remain high. Use the information below as part of your tool kit, learn from it but never ever make an investment decision based on what Tepper, Soros or Buffett are doing in their portfolio. Importantly, most of you reading this are better off just buying the S&P 500 ETF (SPY) or the Russell Value and Growth ETFs (IWD and IWF) or a balanced fund ETF (AOA, AOM, or VBAL.TO in Canada) over the long run. Never risk more than you can afford to lose, it's a sure road to ruin.
• It's important to also note that even the best fund managers get clobbered once in a while. Over 90% of active managers underperform the S&P 500 on any given year and over a four-year rolling basis which is why most big pensions index their US stock exposure and use portable alpha strategies to invest in external hedge funds. True, at any given time, there are very hot portfolio managers. Cathie Wood, founder and CEO and CIO of Ark Investment Management is very hot this year, calling the Tesla bull run and invested in disruptive technologies, but it remains to be seen if she will stay at the top  or go the way Bill Miller went after beating the S&P for 15 years in a row. Still, you can invest in the Ark Innovation ETF (ARKK) if you want exposure to her ideas for low fees. My point is even the best of the best get clobbered inn these markets on any given year (Ray Dalio's Pure Alpha fund is down 18% YTD). 
• Speaking of best of best, I almost fell off my chair this week listening to Josh Borwn on CNBC's Halftime Report touting Crowdstrike (CRWD) because Chase Coleman increased his position in Q2 and "he's the best living hedge fund manager alive." Umm, no he isn't Citadel's Ken Griffin is the best hedge fund manager alive followed by Steve Cohen and Izzy Englander but Chase Coleman is a very good tech stocks picker (so is Coatue's founder Philippe Laffont who massively increased his position in Crowdstrike in Q2 and is still a top holder of the stock).
  
• What else? A lot of talk of Buffett did this or that or Soros did this or that. Both these gentlemen are legends but they're close to or over 90 years old and not managing the day-to-day portfolios. Buffett has two lieutenants and Soros has a great female CIO managing his portfolio. Don't read too much into their moves. I laugh when I hear folks on CNBC who think Buffett is predicting a "flat yield curve for years" which is why he sold most of his banks in Q3 (Soros maybe but Buffett couldn't care less about the yield curve or macro trades in general).
• What I find fascinating about going over top holdings of top fund managers is you get to appreciate the diversity in views and also see where the crowded trades are. And it's also worth noting, while many top hedge funds gorged on tech stocks and gold in Q2, others make a killing focusing on retail names. For example, Lone Pine Capital Management and Melvin Capital Management are top holders of L Brands (LB), a stock that popped big this week on good earnings and has rallied sharply off its March lows and has more room to run higher.

There are always opportunities in the stock market, you just need to focus your attention on the bigger picture and not one or two stocks.

A few more points to help many of you:

• I've already stated most of you are better off over the long run just investing in the S&P 500 ETF (SPY). If you like Tech, Tech, Tech then invest in tech ETFs (QQQ or XLK) or Cloud ETFs (CLOU or WCLD) or Fintech ETFs (FINX or IPAY). Just make sure you look at the fees these ETFs charge and look closely at the holdings because many ETFs are very concentrated in a few companies.
• What else? Try to understand the big picture. For example, cyclical sectors like Financials (XLF), Industrials (XLI), Energy (XLE) and Materials (XLB) tend to do well right before the economy is ready to turn the corner and do well. The heard part is figuring out exactly when that is. Conversely, in tough economic times, Utilities (XLU), Staples (XLP), Real Estate (XLRE), and Healthcare (XLV) tend to outperform and provide stable yields. However, things are unclear in Real Estate right now and there's a lot of biotech (XNI) in healthcare so it's not always easy to make these big calls. As far as tech (XLK), portfolio managers view it as a defensive sector with growth and in an ultra-low yield environment, they can't seem to get enough growth stocks and will always find a way to explain investing in them despite crazy high multiples. Hedge funds love growth stocks, they trade them and some of them make a lot of money trading them.

What else? I want you to get used to charting stuff on StockCharts. It's free and only advanced traders really need to pay for extra services. You just type in any symbol at the very top and then a default chart pops ups showing you a daily chart with a default period, daily RSI, daily MACD, and 50-day and 200-day simple moving averages (these are the defaults).

For example, I typed in "AAPL" at the top of the StockCharts web page to get the default chart on Apple:

For example, here is Apple's 5-year weekly chart using the weekly simple moving averages I set as my defaults:

You see how it's still trading above its 20-week moving average but toppish and the weekly MACD is telling me a reversal might be going on here (still positive but declining).

I use daily charts for short-term trading and weekly charts for long-term trading ideas and to gauge the long-term trend. You can use the simple or exponential moving averages tor whatever technical indicator you like, just remember, all stock are different so be careful interpreting too much into any stock using these technical indicators (just another tool, that's all). 

What do I mean by that? If you 're buying Enbridge (ENB) to collect the 8% dividend, you don't really care if it's trading choppy and a bit weak as long as the stock doesn't crater, wiping out your gains from the dividend and more:

Let's add something else to your toolkit. I want you to go to barchart.com and hover your cursor over stocks at the very top to see this image:

Here's is what I like to look at every day:

• Today's advances and declines for All US Exchanges (default setting) and then switch period to see top gainers and losers for the week, YTD or whatever period and change settings to view it for large cap shares or ETFs (once you change settings, it automatically updates).
• Top performing sectors for the day and week. Again, you can view many periods, play around with the default settings.

Other experts (like Jon and Pete Najarian) like to look at unusual activity in the options market to buy short-term positions in stocks or options when there's unusual call option buying. They also engage in covered call strategies and buy and sell volatility when the VIX is low or high. 

Top multi-strategy hedge funds have teams of experts doing this all day long on top of other sophisticated and not-so-sophisticated derivatives strategies.

Why am I sharing this with you? To make a point, the stock market is continuously on the move, to really stay abreast of everything going on, you need to put in a lot of time reading and looking at all sorts of data and charts in real time.

I tweet a bunch of articles on Twitter and charts on Stocktwits but I don't have time covering everything I read or look at every day, it's impossible and quite frankly, very time consuming. 

This is why I reserve every Friday on my blog to go over markets where I can really go over my market thoughts in more detail.

But most people simply don't have the time to analyze markets either because that's not their number one job or because they simply don't care. Again, these people are much better off investing in a low fee ETF (like SPY) or low fee balanced fund managed by experts.

I realize this comment is long but please stick with me, we have only scratched the surface and are now getting into the fun stuff, I promise.

For this comment, I am still using the old Nasdaq website. It will eventually be retired and everything will migrate to the new Nasdaq website.

I'm not a huge fan of the new website but truth be told, I'm just pissed because I'll have to manually change a bunch of links again.

Anyway, what did top funds buy and sell last quarter?

Strangely enough, the traditional market news sources didn't do a great job covering 13-F filings this week.

Zero Hedge did a good job going over what hedge funds bought and sold in Q3:

While we live in a time when the holdings of the top 20 Robinhood "investors" have far more information value for markets and other traders than a glimpse into what hedge funds are doing, not in the least because retail investors are outperforming both the S&P500 and hedge funds 10-to-1...

... unfortunately there is still no regulatory requirement for even superstar retail investors to disclose their holdings, which is why we have to be satisfied with the quarterly 13-F publication spectacle, which just concluded today, and which revealed that even as tech stocks suffered two correction shakeouts since early September, hedge funds mostly stuck with the "safety" of tech stocks during the third quarter heading into the election, even as some hedge funds trimmed Amazon.com as the dominant e-commerce platform thrived amid a pandemic-fueled surge in online shopping, while others sold Netflix

Courtesy of Bloomberg, below is a snapshot of what some of the most prominent tech stock additions as disclosed by today's barrage of 13F filings:

• Coatue Management doubled its holdings of Tesla in the three months ended Sept. 30, making the electric-vehicle maker its second-biggest publicly disclosed holding. Assuming the fund held on, the bet proved prescient with the stock soaring in late trading Monday after it was announced that Tesla will enter the S&P 500 next month.
• Gabe Plotkin’s Melvin Capital Management bought an additional 2.5 million shares of Expedia Group Inc, while Stephen Mandel’s Lone Pine Capital added stay-at-home play DocuSign Inc. and snapped up more shares of Shopify Inc., Facebook Inc., Microsoft Corp. and Netflix Inc.
• D1 Capital and Soroban Capital Partners were among funds that increased their holdings in Microsoft.
• One recent initial public offering that received a lot of attention from hedge funds was Snowflake Inc. The software company was a top new buy for Berkshire, D1 Capital and Temasek Holdings.

Not everyone added to their tech holdings, with some selling although it was not clear if funds that trimmed tech stocks did so because they’ve soured on the investments or if its part of a portfolio exposure plan to manage risk associated with soaring stocks.

• Dan Sundheim’s D1 Capital cut its stake in Netflix by 89% in the third quarter, selling more than 951,000 shares. That’s surprising given Sundheim has long held bullish views of the online-streaming service and last year said the stock could reach $1,000. So far, this has been a prescient move, with Netflix dropping 4.2% in the fourth quarter, as work from home stocks were hammered following vaccine news.
• Lone Pine trimmed holdings in Amazon.com Inc. and Zoom and pared its stake in Salesforce.com. Fellow Tiger-cubs Maverick, Viking and Tiger also trimmed their Salesforce holdings. David Tepper’s Appaloosa Management, Viking and D1 either reduced or liquidated their Amazon stakes.
• Work from home winner Netflix Inc. was trimmed by several funds, including Stanley Druckenmiller’s Duquesne Family Office, Appaloosa and Corvex Management, while Melvin Capital Management exited its stake.
• Maverick Capital boosted its exposure to tech by more than 9% in the third quarter. In the last quarter upped its stake in semiconductor equipment company LAM Research Corp. and business-payments company FleetCor Technologies Inc. Even though it sold some Facebook Inc. shares, the tech giant is still Maverick’s biggest U.S. long holding.
• As noted earlier, Berkshire Hathaway continued its trend of pulling back on certain financial bets in the quarter, cutting its Wells Fargo stake and JPMorgan Chase & Co. bet. The company also trimmed holdings in PNC and M&T Bank.
• Saudi Arabia’s sovereign wealth fund retrenched from its big jump into U.S.-traded stocks battered by the pandemic. The Riyadh-based Public Investment Fund cut its U.S. holdings to $7.0 billion from $10.1 billion during the third quarter, mainly by selling stakes in exchange-traded funds that track the real estate and materials sectors. That left a $2.7 billion stake in Uber Technologies Inc. as its largest U.S. traded holding.

Finally, a quick look at what some of the marquee hedge funds bought and sold in Q3:

ADAGE CAPITAL PARTNERS

• Top new buys: BMY, LSPD, SAGE, PH, OXY, TWTR, RKT, WEC, ANNX, CMI
• Top exits: PFE, CCK, TM, GRA, HSC, ATR, WM, SIRI, VMC, PCG
• Boosted stakes in: AMZN, JNJ, ST, BRK/B, HZNP, UPS, UAA, HON, DHR, TXN
• Cut stakes in: OTIS, ROST, CSCO, BAC, RTX, C, FIVE, ITT, FCX, BMRN

• APPALOOSA

• Top exits: AVGO, QCOM, VST, TSLA, HUM
• Boosted stakes in: PCG, MU, MSFT, ET
• Cut stakes in: AMZN, T, GOOG, BABA, FB, NFLX, PYPL, WFC, V, MO

BALYASNY ASSET MANAGEMENT

• Top new buys: LULU, BAC, GOOGL, TJX, SNX, ROP, CARR, VAR, TMUS, XOM
• Top exits: JPM, FLT, NSC, C, NKE, AZN, SAIC, TWLO, LSTR, CTLT
• Boosted stakes in: MCD, CTSH, MDT, SWKS, WAT, CMCSA, RTX, TWTR, AJG, MSI
• Cut stakes in: FISV, QGEN, LITE, NXPI, QRVO, ITW, DKS, GM, LHX, HOLX

BAUPOST GROUP

• Top new buys: PSTH, MU, AMAT, PEAK, HWM
• Top exits: AKBA, HCA, ABC, UNVR, VTR
• Boosted stakes in: PCG, SSNC, VRNT, HDS, VSAT
• Cut stakes in: EBAY, GOOG, TBPH, HPQ, FB, VIST, CLNY, FOXA, QRVO

BERKSHIRE HATHAWAY

• Top new buys: ABBV, MRK, BMY, SNOW, TMUS, PFE
• Top exits: COST
• Boosted stakes in: BAC, GM, KR, LILAK
• Cut stakes in: WFC, JPM, PNC, GOLD, MTB, LBTYA, AXTA, DVA, AAPL

BRIDGEWATER ASSOCIATES

• Top new buys: WMT, PG, KO, JNJ, PEP, MCD, ABT, MDLZ, EL, DHR
• Top exits: INDA, LMT, PM, FIS, MO, CI, FISV, ADP, AMT, TMUS
• Boosted stakes in: BABA, EEM, VWO, IEMG, COST, SBUX, JD, TGT, NIO, DG
• Cut stakes in: IVV, SPY, FXI, MCHI, EWY, EWZ, LOW, HD, SHW, SINA

COATUE MANAGEMENT

• Top new buys: SNOW, RUN, Z, NUAN, LB, ZG, GPS, DECK, AEO, URBN
• Top exits: BA, HWM, SFIX, NOW, TDG, BBBY, TWTR, SKT, HD, AAP
• Boosted stakes in: TSLA, GPN, SQ, PLAN, UBER, SHOP, FB, DIS, DOCU, NFLX
• Cut stakes in: LBRDK, DXCM, SMAR, OKTA, MU, GH, DDD, SRNE, SDC, LRCX

CORSAIR CAPITAL MANAGEMENT

• Top new buys: PSTH, ECPG, BERY, CCK, APG, PCG, GSAH, MS, LKQ, GVA
• Top exits: IWO, REPH, HGV, IWM, SMIT, GSL
• Boosted stakes in: VRT, GDDY, NATR
• Cut stakes in: QQQ, BXRX, PRSP, VOYA, PLYA, CHNG, STAR, HMHC, C, WMB

CORVEX MANAGEMENT

• Top new buys: ILMN, FE, ACM, TWTR, DIS, ZEN, HCA, NAV, FIVE
• Top exits: IAA, CNC, TIF, FLMN, CZR
• Boosted stakes in: EXC, BABA, ATVI, CNP, ATUS, CMCSA, HUM, LYV, EVRG
• Cut stakes in: MSGS, AMZN, PCG, NFLX, ADBE, TMUS

D1 CAPITAL PARTNERS

• Top new buys: U, IR, BEKE, BLL, DT, SNOW, OM, GDRX, ADI, CD
• Top exits: AMZN, AZO, FLT, BFAM, ESTC, TSM, SBUX, API, ALLO, HST
• Boosted stakes in: CVNA, JD, MSFT, EXPE, GOOGL, PNC, LYV, FB, RH, JPM
• Cut stakes in: BABA, NFLX, LVS, DHR, FIS, HLT, AVB, ORLY, PLAN, HPP

DUQUESNE FAMILY OFFICE

• Top new buys: NUAN, GDX, NEE, XLI, EXPE, CVNA, PANW, ADI, SNE, NET
• Top exits: XBI, HD, WFC, CB, INSM, SRPT, AZO, MAR, CRWD, TCDA
• Boosted stakes in: MSFT, PENN, BABA, TMUS, SBUX, MELI, AMZN, JD, VZ, FIS
• Cut stakes in: JPM, PYPL, WDAY, GOOGL, BKNG, CCL, LYV, FSLY, REGN, NFLX

ELLIOTT MANAGEMENT

• Top new buys: UNIT, CUB
• Top exits: T, RYAAY, SPR
• Boosted stakes in: DELL, CRMD
• Cut stakes in: WELL, RILY

ENGAGED CAPITAL

• Top new buys: EVH, MX
• Top exits: SMPL
• Boosted stakes in: NCR, STKL, IWM
• Cut stakes in: MED, RCII

GREENLIGHT CAPITAL

• Top new buys: SNX, NCR, TWTR, INTC, INGR, DDS, UHAL, ICPT, GHC, PANA
• Top exits: TPX, SATS, WHR, XELA
• Boosted stakes in: GLD, AAWW, JACK, REZI, NBSE
• Cut stakes in: AER, GDX, GPOR, CNX, APG, TECK, CC, CHNG

ICAHN

• Boosted stakes in: IEP, XRX
• Cut stakes in: HLF, LNG

IMPALA ASSET MANAGEMENT

• Top new buys: FDX, RKT, FCX, VALE, SBSW, FND, MHK, ALK, THO, AGQ
• Top exits: QCOM, HES, VAC, DOOO, MU, TGT, DKS, SKX, TJX, CRNC
• Boosted stakes in: KSU, WYNN, KNX, KL, CMI, SBLK, CNK, CENX
• Cut stakes in: RIO, SIX, DRI, HOG, TOL, ADNT, TTWO, NSC, MT, LPX

LAKEWOOD CAPITAL MANAGEMENT

• Top new buys: LBRDK, TMUS, CWH, GLD, LOW, UPWK, SAIC, VVV, MIK
• Top exits: YNDX, BLDR, NKLA, SHAK
• Boosted stakes in: ABG, ANTM, COF, C, SKX, APO, BHC
• Cut stakes in: BIDU, BC, CI, CMCSA, CWK, AXS, GOOGL, WRK, FB, GS

LANSDOWNE

• Top new buys: IDA, BLDP, EQT, CDE, LOOP, KCAC, RIDE
• Top exits: ONEM, GE, SMMT, GDX, AAL, NKE, SALT
• Boosted stakes in: FCX, TSM, OTIS, FSLR, EGO, DAR, ETN, COG, TMUS, AG
• Cut stakes in: C, MU, DAL, LRCX, AMAT, LUV, UAL, AES, ADI, VMC

LONG POND

• Top new buys: GLPI, PGRE, EXPE, NTST, H, MGP, XHR, RLJ
• Top exits: FR, SEAS, INVH, MAR, HST, BXP, TRNO, DRH, ESRT, REXR
• Boosted stakes in: EQR, AVB, SHO, WELL, AIV, RHP, DEI, HPP, CPT, JBGS
• Cut stakes in: HLT, PEAK, WH, SBRA, MAA, MAC, HGV, LVS

MAGNETAR FINANCIAL

• Top new buys: VAR, MXIM, MPLN, BMCH, GLIBA
• Top exits: QGEN, PAYA, UTZ, FSR, HYLN, CCC, PACB, SNY, PCG, IR
• Boosted stakes in: EHC, ABBV, GRUB, PIC, SYNH, NVS, PTAC, MRK, CHNG, AVTR
• Cut stakes in: UBER, VLDR, LCA, AZN, BDX, NOVA, HCAC, PRGO, PKI, PAE

MAVERICK CAPITAL

• Top new buys: BX, NKE, GPN, BECN, GPRO, OSH, GME, MCD, LB, TGT
• Top exits: BTI, STNE, IRBT, SCHW, NTAP, GIS, CHGG, FL, PLCE, BIG
• Boosted stakes in: LRCX, GLW, TGTX, LOGI, FLT, PRSP, DD, AMAT, LIVN, AXP
• Cut stakes in: GOOG, NFLX, AVTR, DLTR, MSFT, APD, AMZN, FB, HUM, ALNY

MELVIN CAPITAL MANAGEMENT

• Top new buys: ALGN, MCD, DDOG, TJX, AMD, MSCI, WDAY, SBAC, LYV, TEAM
• Top exits: CRM, FLT, FIS, CSGP, WEN, YUM, TWLO, NFLX, FB, VRSN
• Boosted stakes in: BABA, PINS, NKE, NOW, EXPE, ADBE, FISV, GOOGL, DOCU, LVS
• Cut stakes in: AZO, PYPL, AMZN, MSFT, DPZ, JD, RACE, DECK, CAR, BURL

OAKTREE CAPITAL MANAGEMENT

• Top new buys: MEG, UNIT, VALE, AMX, CEO, EQR, GTXMQ, XPEV, LEA
• Top exits: TMHC, BABA, CZR, IHRT, CCO, SRNE, BCEI
• Boosted stakes in: TRMD, NMIH, IBN, EGLE, KC, TV, ASC, ITUB
• Cut stakes in: CCS, AU, TSM, PBR, MELI, BBD, API, GTH, INDA, BIDU

OMEGA ADVISORS

• Top new buys: GOOGL, ATH, VRT, MSI, FVAC, EPD, MNRL
• Top exits: JPM, CNC, GTN, VICI, DNRCQ
• Boosted stakes in: COOP, OCN, ASPU, FCRD, NAVI, STKL, AMCX, ASH, FOE, SNR
• Cut stakes in: CI, PE, SRGA, GCI, NBR, LEE, ABR

PERSHING SQUARE

• Cut stakes in: A, HLT, LOW

SOROBAN CAPITAL

• Top new buys: ADI, PSTH, FISV, FIS, ARMK
• Top exits: NOC
• Boosted stakes in: YUM, ATUS, MSFT, CSX, RTX
• Cut stakes in: FB, SNE, AMZN

SOROS FUND MANAGEMENT

• Top new buys: QQQ, PLTR, XLI, MCHP, U, VAR, MXIM, DIS, MCHI, NGHC
• Top exits: TDG, GRFS, BK, BAC, JPM, GS, PNC, USB, WFC, TFC
• Boosted stakes in: DHI, DRI, ARMK, GM, ATVI, PFSI, TIF, MT, CHTR, APTV
• Cut stakes in: IGSB, PCG, TMUS, NLOK, PTON, C, GOOGL, OTIS, LPLA, LQD

STARBOARD

• Top new buys: SPY, CTVA
• Top exits: EBAY
• Boosted stakes in: ACM, ACIW, IWN, GDOT, IWR, MMSI, SCOR, BOX
• Cut stakes in: NLOK, AAP, IWM, CERN, CVLT

TEMASEK HOLDINGS

• Top new buys: DCT, SNOW, SE, IAU, GOVT, SCHP, XLK, BNTX, EWT, IWM
• Top exits: FIS, VRT, PDD, NIO
• Boosted stakes in: PYPL, AMZN, IBN, HDB, DDOG
• Cut stakes in: TME, TMO

THIRD POINT

• Top new buys: PCG, MSFT, TDG, FTV, EXPE, PINS, AVTR, CZR, PLNT, GDRX
• Top exits: BAX, RTX, NKE, EVRG, ATVI, TTWO, GPS, CNNE
• Boosted stakes in: BABA, JD, BKI, FB, V, BURL, INTU, TEL, ETRN, SHY
• Cut stakes in: GB, IQV, ADBE, DIS, AMZN, IAA

TIGER GLOBAL

• Top new buys: SNOW, GSX, BEKE, SUMO, BIGC, JAMF, FROG, GDRX, CD, ASAN
• Top exits: NEWR, ATH, CHWY
• Boosted stakes in: PDD, CRWD, PTON, ZM, NOW, AMZN, UBER, WDAY, TEAM, MSFT
• Cut stakes in: SVMK, PYPL, TWLO, CRM, BABA

TUDOR INVESTMENT

• Top new buys: NGHC, KDP, GDRX, VICI, HEC, FSLR, LIN, RXT, DLR, RPAY
• Top exits: SOXX, O, X, TMUS, TME, NLOK, SCHW, AVB, SJM, CDAY
• Boosted stakes in: GRUB, GLIBA, KC, BDX, GOOGL, AMT, TEAM, CVX, ADBE, AMD
• Cut stakes in: PCG, CRWD, UBER, ATHM, NFLX, SBAC, ESS, BXP, THO, BXMT

VIKING GLOBAL INVESTORS

• Top new buys: TSM, AVB, AMD, RTX, GOOGL, CSGP, ZBH, BILL, BMY, OTIS
• Top exits: UBER, JD, CRM, PLAN, LOW, SHW, LIN, NFLX, DHR, BABA
• Boosted stakes in: MSFT, TMUS, MELI, FIS, CME, JPM, BKNG, PH, NUAN, HLT
• Cut stakes in: AMZN, CMCSA, CI, LVS, ALL, DRI, FTV, SE, RPRX, WDAY

Source: Bloomberg

Zero Hedge also covered the 50 most popular and 50 most shorted hedge fund stocks:

50 Most Popular Hedge Fund Stocks:

50 Most  Shorted Hedge Fund Stocks:

Speaking of Tesla, check out the mini bubble happening right now in smaller electric vehicle stocks like Ayro Inc (AYRO) and Electrameccanica (SOLO):

 
It is just nuts, the shares have gone exponential this month on massive volume and while people will blame retail investors (Robinhoodies, Dave Portnoy's gang, etc.) I wonder if a hedge fund like RenTec  or some asset managers like BlackRock or other large ones aren't behind these moves.

It's like anything that is ESG is being bought hard on massive volume, shoot first, ask questions later, just nuts.

What else did I look at this week?. I checked out who added to Snap Inc (SNAP) last quarter and who bought the Palantir IPO (PLTR). Go to the old Nasdaq website, type in  "SNAP" and then "PLTR" at the very top of the page where it prompts you which symbol and then scroll down looking for the institutional holdings link in the blue box on the left hand side of the page:

For Palantir Inc., the who's who of the hedge fund world (Cohen, Soros, etc.) got in on the IPO as did two large Canadian pensions, CPP Investments and PSP Investments:

Shares of Snap and Palantir have been on fire this year and are poised to move higher but always be careful buying any stock after a major run-up, it will retrace before reaccelerating up (I prefer Snap here, it's re-accelerating up).

Have fun looking at the latest quarterly activity of top funds listed below.

The links below take you straight to their top holdings and then click on the column head "Change (%)" to see where they increased and decreased their holdings (you have to click once or twice to see).

These funds are run almost exclusively by men but one of the most impressive ones, ARK, is run by a lady called Cathie Wood, the best investor you never heard of (well, by now, you've heard of her).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Appaloosa LP

2) Citadel Advisors

3) Balyasny Asset Management

4) Point72 Asset Management (Steve Cohen)

5) Peak6 Investments

6) Kingdon Capital Management

7) Millennium Management

8) Farallon Capital Management

9) HBK Investments

10) Highbridge Capital Management

11) Highland Capital Management

12) Hudson Bay Capital Management

13) Pentwater Capital Management

14) Sculptor Capital Management (formerly known as Och-Ziff Capital Management)

15) ExodusPoint Capital Management

16) Carlson Capital Management

17) Magnetar Capital

18) Whitebox Advisors

19) QVT Financial 

20) Paloma Partners

21) Weiss Multi-Strategy Advisors

22) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson  have converted their hedge funds into family offices to manage their own money.

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation (Paul Tudor Jones)

8) Tiger Management (Julian Robertson)

9) Discovery Capital Management (Rob Citrone)

10 Moore Capital Management

11) Element Capital

12) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

Top Quant and Market Neutral Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta. Some are large asset managers that specialize in factor investing.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Cubist Systematic Strategies (a quant division of Point72)

6) Numeric Investors now part of Man Group

7) Analytic Investors

8) AQR Capital Management

9) Dimensional Fund Advisors

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Angelo Gordon

14) Quantitative Systematic Strategies

15) Quantitative Investment Management

16) Bayesian Capital Management

17) SABA Capital Management

18) Quadrature Capital

19) Simplex Trading

Top Deep Value, Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) TCI Fund Management

4) Baron Partners Fund (click here to view other Baron funds)

5) BHR Capital

6) Fisher Asset Management

7) Baupost Group

8) Fairfax Financial Holdings

9) Fairholme Capital

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Miller Value Partners (Bill Miller)

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Polaris Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

49) Trian Fund Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Viking Global Investors

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) Tiger Global Management (Chase Coleman)

8) Coatue Management

9) D1 Capital Partners

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Honeycomb Asset Management

27) New Mountain Vantage

28) Penserra Capital Management

29) Eminence Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) Suvretta Capital Management

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Marshall Wace

63) Light Street Capital Management

64) Rock Springs Capital Management

65) Rubric Capital Management

66) Whale Rock Capital

67) Skye Global Management

68) York Capital Management

69) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Avoro Capital Advisors (formerly Venbio Select Advisors)

2) Baker Brothers Advisors

3) Perceptive Advisors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Birchview Capital

10) Ghost Tree Capital

11) Sectoral Asset Management

12) Oracle Investment Management

13) Palo Alto Investors

14) Consonance Capital Management

15) Camber Capital Management

16) Redmile Group

17) RTW Investments

18) Bridger Capital Management

19) Boxer Capital

20) Bridgeway Capital Management

21) Cohen & Steers

22) Cardinal Capital Management

23) Munder Capital Management

24) Diamondhill Capital Management 

25) Cortina Asset Management

26) Geneva Capital Management

27) Criterion Capital Management

28) Daruma Capital Management

29) 12 West Capital Management

30) RA Capital Management

31) Sarissa Capital Management

32) Rock Springs Capital Management

33) Senzar Asset Management

34) Southeastern Asset Management

35) Sphera Funds

36) Tang Capital Management

37) Thomson Horstmann & Bryant

38) Ecor1 Capital

39) Opaleye Management

40) NEA Management Company

41) Great Point Partners

42) Tekla Capital Management

43) Van Berkom and Associates

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) BlackRock Inc

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase& Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Kornitzer Capital Management

21) Batterymarch Financial Management

22) Tocqueville Asset Management

23) Neuberger Berman

24) Winslow Capital Management

25) Herndon Capital Management

26) Artisan Partners

27) Great West Life Insurance Management

28) Lazard Asset Management 

29) Janus Capital Management

30) Franklin Resources

31) Capital Research Global Investors

32) T. Rowe Price

33) First Eagle Investment Management

34) Frontier Capital Management

35) Akre Capital Management

36) Brandywine Global

37) Brown Capital Management

38) Victory Capital Management

39) Orbis

40) ARK Investment Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) CI Investments

20) Venator Capital Management

21) Van Berkom and Associates

22) Formula Growth

23) Hillsdale Investment Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (BCI)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, a regulatory filing revealed a slew of changes to Berkshire Hathaway's portfolio in the third quarter. CNBC's Becky Quick reports.