Alberta Investment Management Corp. (AIMCo) chief executive Kevin Uebelein will step down early, most likely by July 2021, once the $119-billion public asset manager concludes a freshly launched search for his replacement.

Uebelein has been CEO since the beginning of 2015, and assets managed by the Crown Corporation have grown by nearly 42 per cent during his tenure.

But he was also at the helm when a volatility trading strategy caused $2.1 billion in losses as the coronavirus pandemic roiled markets earlier this year, which prompted the board of directors to conclude in June that risk management controls were “unsatisfactory” and that a culture change was needed at AIMCo.

In an exclusive interview with the Financial Post this week, Uebelein said he and the board concluded that AIMCo needs a leader with a fresh perspective and a horizon of several years as it faces down “long-term pivotal issues.” These include how to deal with the economic turmoil and recovery from the pandemic and the impact it will have across various asset classes and geographies, and on long-term liabilities.

“We decided now was the right time,” Uebelein said, acknowledging that a mid-2021 transition would be before his contractual obligation to AIMCo is set to expire.

It’s “a very modest acceleration” of the succession timeline, he said, adding that he believes his successor will also have a key role to play in the evolution of AIMCo’s relationships and collaboration with clients.

“When we think about the challenges presented to long-term investors like pension funds, sovereign wealth funds, or insurance companies … it calls for ever-increasing and improving collaboration between those clients and organizations like AIMCo,” he said.

Mark Wiseman, chair of AIMCo and also of the board committee overseeing the hunt for a new CEO, said Uebelein was not asked to leave and will remain in charge of implementing the 10 recommendations contained in the board’s report on what went wrong with the VOLTS volatility trading program. Those recommendations broadly target risk-management across the organization.

“We have full confidence in him to implement all those recommendations,” said Wiseman, who was CEO of the Canada Pension Plan Investment Board between 2012 and 2016.

“Obviously the VOLTS situation is one that’s regrettable (that) we don’t want to repeat,” Wiseman said.

In June, Uebelein told the Financial Post the volatility program had been completely wound down and some AIMCo employees had left the organization since the losses were incurred over several days in March.

“The VOLTS-specific changes are already done and dusted,” he said this week.

Wiseman declined to say whether the change in leadership is also intended to prepare AIMCo for a possible influx of money if Alberta goes ahead with an idea under consideration to remove the province’s contributions from the Canada Pension Plan and instead invest them through the provincial asset manager.

In September, the Alberta government began accepting bids for a contract to study the pros and cons of opting out of CPP and setting up a provincial retirement plan — including the cost and structure of the potential Alberta Pension Plan.

“We leave policymaking to politicians and policy makers. This is a decision for the Alberta government to make,” Wiseman said.

Under a controversial bill passed by Alberta’s United Conservative Party late last year, AIMCo is already taking on investment management duties for the Alberta Teachers’ Retirement Fund. Combined with other public investment funds being tucked into AIMCo, this amounts to more than $30 billion in additional assets under management.

Uebelein said the recent addition of three clients — the Alberta Teachers’ retirement fund, the investment portfolio of Alberta Health Services, and the investment portfolio of the province’s workers’ compensation board — would boost AIMCo’s assets under management by more than 25 per cent.

“To be honest, we have to scale regardless,” Wiseman said.

“There is a strong belief that I and the entire board share in the power of a strong public asset manager and in that regard, irrespective of what takes place around the potential for Alberta to split from CPP or not, Alberta needs, deserves, and should have a world-class public asset manager.”

AIMCo’s board is being transparent about the search for a new CEO and timing of the leadership changeover because, though it might have been preferable to wait until a successor is found, “you can’t do a search process in this day and age without it becoming public,” Wiseman said.

It will be a broad international undertaking, with candidates both inside and outside the asset manager considered for the top job, he said.

Wiseman and Uebelein worked together previously at the Canadian Coalition for Good Governance, an institutional investor rights group, and they said AIMCo is intent on creating the kind of smooth and well-thought-out CEO transition plan that the CCGG pushes corporations to adopt.

“The world is changing fundamentally … for us and our clients,” Wiseman said. “This is all about looking forward. (AIMCo) can and will be even better in the decades ahead and it’ll grow from the strong foundation Kevin has helped put in place.”

Andrew Willis of the Globe and Mail also reports that AIMCo CEO Kevin Uebelein is stepping down in wake of $2.1-billion loss:

The chief executive officer of Alberta’s $119-billion, government-owned fund manager is departing in the wake of a $2.1-billion loss this year that was traced to flaws in the Crown corporation’s risk management and corporate culture.

Kevin Uebelein, CEO of the Alberta Investment Management Corp. since 2015, will leave by the end of June, 2021, the Edmonton-based fund manager said Wednesday. AIMCo director of communications Dénes Németh said: “This decision is Kevin’s. His natural term ending date is in the not-too-distant future, and accordingly he believes that the board should begin the search for his successor now.”

AIMCo invests on behalf of 31 clients, including pension plans for provincial government employees and Alberta’s $17-billion Heritage Savings Trust Fund. The fund manager lost $2.1-billion on trading strategies linked to market volatility in the spring and early summer. The investments performed far worse than expected as stock markets plunged, then rallied as the pandemic hit North America. AIMCo significantly underperformed peers during this period.

An independent audit commissioned by AIMCo’s board subsequently concluded the fund manager’s investment and risk management systems were at fault. In a report, the board said: “The breadth and depth of risk governance controls, collaboration and risk culture, while evolving and improving over the past 2-3 years, are still unsatisfactory.”

AIMCo appointed a new chairman in June: former Canada Pension Plan Investment Board CEO Mark Wiseman. Shortly thereafter, AIMCo vice-president of public equities Peter Pontikes and portfolio manager David Triska departed. Both oversaw the volatility trading strategy.

In October, AIMCo recruited a new chief risk officer, Andrew Tambone, the former chief investment officer of the Workers’ Compensation Board – Alberta. The fund manager also created a new role, a chief investment strategy officer who reports to the CEO, and hired Bank of Montreal veteran Amit Prakash, who oversaw alternative asset strategies as a managing director at BMO Global Asset Management.

The executive is turning over as Alberta Premier Jason Kenney moves forward with plans to bring the independently run, $18-billion pension plan for provincial teachers into AIMCo, a move the teachers’ union opposes. Mr. Kenney’s government has also begun a study into moving Alberta’s contributions to the Canada Pension Plan into a new provincial pension, and AIMCo has been discussed as a potential operator of such a plan.

“AIMCo faces several important inflection points, including the integration of important new clients and responding to and recovering from a tumultuous global economy,” Mr. Uebelein said in an internal e-mail to AIMCo staff and clients on Wednesday. “These factors, and others, will take years to fully address and accomplish. For this reason, I believe that now is the right time for identifying the next chief executive.”

Mr. Uebelein’s compensation totalled $2.8-million last year, making him one of the best-paid civil servants in Alberta. Public filings from AIMCo clients show the fund manager was one of Canada’s worst-performing pension plans in the first three months of 2020, and has consistently missed performance benchmarks.

The $3-billion Special Forces Pension Plan for police officers, an AIMCo client, reported in early June that its fund was down 12.2 per cent in the first quarter of this year, compared with a 6.7-per-cent decline in their benchmark. AIMCo posted a 10.2-per-cent loss on a $50-billion portfolio belonging to its largest client, a fund for health care and municipal workers called the Local Authorities Pension Plan, or LAPP. The average Canadian pension plan lost 8.7 per cent of its value in the first three months of this year, according to consulting firm Mercer.

In addition to losses on volatility-linked strategies, filings from clients show AIMCo turned in poor results in the first three months of the year in stock, bonds, real estate and private equity investments. Last year, LAPP said AIMCo’s results fell short of the pension plan’s value-added expectations for 46 consecutive quarters, or 11 years 6 months.

In April, Mr. Uebelein apologized for the losses on volatility trading, and said in an open letter: “Let me be clear, the performance of this investment is wholly unsatisfactory, and AIMCo’s board and management share the frustration and disappointment of our clients, their beneficiaries and all Albertans.”

Janet French of the CBC also reports CEO is leaving AIMCo in wake of $2.1-billion investment loss:

The CEO of the Alberta Investment Management Corporation is leaving the organization by the end of June 2021 in the wake of AIMCo's heavy investment losses earlier this year.

Kevin Uebelein, who has held the top AIMCo post since 2014, has agreed with the board to "begin now the process of CEO leadership transfer," AIMCo spokesperson Denes Nemeth said in an email Tuesday.

"AIMCo remains in very capable hands with Kevin continuing at the helm until that date and he has the full support of the board and management as he continues to advance the many priorities before us," Nemeth wrote.

Uebelein was paid $2.8 million in compensation in 2019 and $3.4 million in 2018, according to AIMCo's annual reports.

AIMCo, a provincial corporation, manages the investments of several provincial government funds, including the Heritage Savings Trust Fund. It also invests money in the pension funds of more than 300,000 Alberta public sector workers.

AIMCo has been under scrutiny since the spring, when investment managers lost $2.1 billion on a risky investment strategy known as VOLTS. The strategy cost the Heritage fund $411 million, and was partly responsible for Alberta's nest egg hitting its lowest value in eight years this spring.

The losses prompted AIMCo's board to order an external review, and the corporation pledged to improve.

In June, the reviewers found internal challenges to investment decisions, risk controls, collaboration and risk culture within the organization were "unsatisfactory."

Senior leaders at AIMCo didn't have enough information, fast enough, about the potential risk to their investments, the reviewers concluded. They said AIMCo needed a culture change to prevent future losses.

AIMCo could manage future provincial pension plan

The corporation has been under additional public and political scrutiny since the United Conservative Party government passed a bill in 2019 requiring the Alberta Teachers' Retirement Fund to use AIMCo as its investment manager. About 83,000 current and retired teachers are affected by the change, which is expected to be complete in 2021.

Bill 22 also required three large public sector pension plans to use only AIMCo as their investment manager. It also gave the government the right to reject potential nominees to pension plan boards.

Finance Minister Travis Toews has said the moves would allow AIMCo to add substantially to the $119-billion worth of assets it manages, which would bring economies of scale. He said teachers and taxpayers would save investment management fees if AIMCo took charge of the investing.

The government is also exploring the option of creating a provincially run public pension plan and pulling Alberta out of the Canada Pension Plan (CPP). An Alberta-run pension plan could be managed by AIMCo.

In September, the government issued a request for proposals for a contractor to study the potential risks, benefits and requirements of establishing a provincial pension plan. If the benefits outweigh the risks, the government has said it would put the question to a provincial referendum in 2021.

The moves have generated pushback from the public and sparked campaigns advocating government stay away from pensions. NDP labour and immigration critic Christina Gray tabled a private members' bill earlier this year that sought to stop the moves, but it was dismissed by the government.

On Tuesday, Gray said Uebelein's departure raises questions about the advice AIMCo has given the government about consolidating more assets under AIMCo's control.

In July, Gray and her caucus colleagues delivered to the premier's office a list of 36,000 names signed on petitions advocating a halt to the pension changes.

"Albertans are so concerned about retirement security, about being forced to use AIMCo, and about this government's move toward leaving the Canada Pension Plan, which has been stated by the government, involves AIMCo," Gray said.

Gray said AIMCo should be more transparent about the causes and consequences of the $2.1-billion investment loss.

The future of AIMCo

Nemeth said AIMCo's board is immediately starting an international search for a new CEO, and will consider candidates inside and outside the organization.

Nemeth said Uebelein's departure was his decision, not the board's.

"His natural term ending date is in the not too distant future, and accordingly he believes that the board should begin the search for his successors now," he wrote.

He did not provide a date for the end of his term, or information about any potential severance payments.

Uebelein hasn't indicated his future plans, he said.

There have been other changes to AIMCo's executive team since the losses first became public in April. Two other senior leaders left the company in June, and the names of three other executives have disappeared from AIMCo's senior team page on its website. This month, the corporation announced a new chief financial officer, new chief risk officer and the promotion of a vice-president of responsible investment.

Lastly, Leanna Orr of Institutional Investor also reports that AIMCo CEO Kevin who oversaw massive vol losses is stepping down:

Alberta Investment Management Corp. CEO Kevin Uebelein is on his way out, having led the public fund as it lost billions on wayward volatility trades and became the center of bitter political battles between the province’s far-right government and its own unionized clients.

AIMCo managed C$119 billion in pension assets, sovereign wealth, and other public money for Alberta’s civil servants and citizenry as of the end of last year.  

“Kevin and the board have agreed to begin now the process of CEO leadership transfer, with the goal of completing this process by June 30, 2021,” after which Uebelein will step down, AIMCo’s communications director told Institutional Investor in an email Friday.

He characterized the decision as Uebelein’s.

“A successor has not yet been named,” the director went on. “The board has struck a CEO recruitment committee, to be chaired by AIMCo Chair Mark Wiseman, and is commencing the search process immediately with an aim to have a candidate in place no later than June 30, 2021. The search will be a broad international undertaking, with candidates both inside and outside the organization considered for the role.”

Canada’s Financial Post first reported the departure plans.

II broke the news of AIMCo’s massive volatility trading losses in April. Uebelein would later attempt to downplay the damage — arguing the fund lost $2.1 billion rather than $3 billion, and blaming markets — but the situation became a province-wide scandal and source of outrage.

AIMCo staffers created and ran the now-defunct volatility program, which involved highly complex trades and esoteric derivatives prone to misuse, experts told II at the time.

Some believed that they were effectively getting free money. Banks were paying to shift risk off their books in order to pass stress tests regulators imposed after the last financial crisis. But, the thinking went, the insurance would never actually pay out, because such a dramatic crash had never happened.

In trader-speak, these kinds of deals are called “selling the small puts” and are often described as picking up pennies in front of a bulldozer.

“Selling the small puts is a beginner’s mistake,” Gontran de Quillacq, a vol market veteran, told II in April. “Anybody with experience in options and volatility trading knows that those ‘century-rare’ events happen every few years — much more frequently than the simpler math would tell you. It’s a guarantee. How often should you play Russian roulette? How about with three bullets?”

Uebelein, of course, was not the trader in charge of these decisions, nor did he initiate the strategy. But the scale of the losses, and decision to shut down the program at its deepest nadir, suggest a grave lapse in oversight and governance, according to experts. “It’s really too bad,” said one Canadian pension insider. “Kevin Uebelein should know better.”

AIMCo did not say what, if anything, Uebelein plans to do next.

The investment organization “remains in very capable hands with Kevin continuing at the helm until that date and he has the full support of the board and management as he continues to advance the many priorities before us,” the communication director said. 

Alright, it's Monday and I decided to tackle this news early this week.

Let me brutally honest, I will not hold back in this comment and will not pander to Canada's powerful pension bosses who tend to stick together through thick and thin.

But I'm also not going to just criticize AIMCo's outgoing CEO and will give you a much better and much more detailed and balanced analysis than what you read in the media.

Speaking of the media, there's a reason Barbara Shecter of the Financial Post first broke this story, she's tight with AIMCo's Chair of the Board Mark Wiseman and he reached out to her to carefully control the spin of the story. 

More on that later. First, I did reach out to AIMCo CEO Kevin Uebelein and Mark Wiseman last week to give them a heads up and ask them if they had anything to share.

Kevin Uebelein emailed me back promptly sharing this:

Thanks for your note. As you can imagine, I am extremely busy between the usual day job (annual budget season here!) and this news. But I did want to respond to you with just a few personal observations, as I know you understand this Canadian pension landscape as well as anyone.

One of the most important jobs of a company’s Board and its CEO is to ensure that leadership transition is well-planned, smooth and is part of the very long-term strategy for the company’s perpetual growth and success.

The AIMCo Board and I discuss leadership and succession issues at every single Board meeting. It is an integrated part of our HR Committee discussion, and in recent months I had openly discussed my own observations and views that the best timing for identifying the next generation of CEO was approaching, as AIMCo continues to work on pivotal issues that will have lasting long-term impact on our clients and on AIMCo. This timing, as it happens, aligns pretty closely with the Board and my existing high-level plans for generational transition, as I enter my seventh year as AIMCo’s CEO. And so, it was my observations and opinions that led us to this decision to embark now on the process of identifying the next CEO for AIMCo.

A few more observations I’d make:

First, we are making this announcement now as a part of our commitment to our core value of transparency. It might’ve been tempting to keep this process private for a while, but that’s not how we like to work. And besides, the rumor mill in these parts is highly efficient, and I’d rather be proactive on a message like this, than to have it spread by any other means.

Second, to quote Monty Python: “I’m not dead yet!” I will continue to be the fully licensed card-carrying CEO until the next leader is appointed.

Finally, as I’ve been sharing this news with the folks with whom I work, I’ve also been sharing that this decision – though I know it is the right one for AIMCo – is made with a heavy heart. I really love AIMCo, its people and its purpose. But, sometimes what’s best for an organization is not exactly what one personally wishes for, and this is one such instance.

I thank Kevin for sharing this with me and approving that I post it publicly. I have no doubt that he loves AIMCo, its people and its purpose.

Was the decision that he departs at the end of June next year entirely his? There I have some doubts and I will be open and honest about this.

I have covered AIMCo's 'VOLTS fiasco' in detail on this blog:

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

Let me be honest, while I understood why Peter Pontikes, AIMCo's formerVice-President of Public Equities and David Triska, the former quantitative portfolio manager who ran the volatility based strategies were the first casualties, I knew there were more heads that were going to roll.

Mark Wiseman was named AIMCo's new Chair of the Board in late June and he had to read a bunch of things, including Barb Zvan's internal report which was never made public to understand what went wrong.

All this to say, while the dismal failure of VOLTS wasn't the only reason behind Kevin Uebelein's departure, it certainly didn't help and everyone knows this wasn't a unilateral decision made by AIMCo's CEO. That's just nonsense.

Mark Wiseman and AIMCo's entire board had their say. But Mark Wiseman being a decent guy and knowing Kevin well helped manage his exit properly so it doesn't look worse than it already does.

Remember, Mark Wiseman was ousted from BlackRock after failing to disclose a 'consensual relationship' with a colleague. 

In my opinion, Larry Fink, BlackRock's CEO, didn't handle that departure particularly well and chose to make a very public example of Mark who to his credit, took full responsibility.

Anyway, that experience undoubtedly factored into his decision to handle Kevin's departure in a much more decent way.

The shame of this is that AIMCo's vol blowup has received a lot more attention than it truly deserves and it tarnishes a lot of good things Kevin Uebelein did during his tenure there.

I've only met Kevin once, found him to be a nice guy but was surprised he was named to succeed Leo de Bever at AIMCo. Why? Because he didn't have the experience at a large Canadian pension to assume such a role.

But I quickly learned that Kevin's strengths were Leo de Bever's weaknesses, and chief among them is he surrounded himself with top people and leaned on them a lot and gave them room to run (Leo was the smartest guy in the room and tended to often suck the air out of the room, had a hard time relinquishing control).

The guy Kevin Uebelein leaned on the most in investments is Dale MacMaster, AIMCO's CIO. 

Dale is an exceptionally bright CIO, he and I have had a few conversations over the years, typically going over the annual results, and I can tell you the truth, they were almost right about VOLTS but the market had the final say and that program was rightly shuttered (in a way, it was good that volatility spiked to an unprecedented level because it exposed the weaknesses in VOLTS, and there were plenty).

But I want to make it clear, there's a lot more to AIMCo than VOLTS and it is completely unfair to judge Kevin Uebelein, Dale MacMaster, or anyone else there solely on the failure of one investment program that succumbed to extreme market volatility.

Importantly, under Kevin's watch, AIMCo's senior managers invested well across public (minus VOLTS) and private markets and they might not have outperformed their peers but it wasn't because of VOLTS, it was because their private equity program isn't as mature as the ones at their large peers.

This brings me to my other points.

I still maintain that Alberta' Government made the right decision amalgamating the Alberta Teachers' Retirement Fund and AIMCo. There was a lot of talk of 'hijacking' the ATRF and while it is a great organization, I always steadfastly agreed with this decision.

I totally disagree with that NDP critic who thinks they need to reverse Alberta's public pension changes. With all due respect, she doesn't know what she's talking about and using the failure of VOLTS to justify reversing these changes is just plain stupid.

Having said this, I vehemently disagreed with Alberta' Government on opting out of the Canada Pension Plan and still do. 

That strategy is about as dumb as the Alberta Government's coronavirus strategy which I predicted on Linkedin weeks ago would be a total disaster. Unfortunately, I've been proven right as Alberta is doing the worst in the country on a per capita basis and they really need to rethink their approach to COVID-19 (expect an announcement as early as tomorrow).

Lastly, who will replace Kevin Uebelein as CEO of AIMCo?

My money is on André Bourbonnais, PSP Investments' former CEO who left that organization to join Mark Wiseman at BlackRock where he still is. He is extremely close to Mark from his days at CPP Investments and is a clear front-runner to succeed Kevin Uebelein at AIMCo.

But Bourbonnais had mixed reviews during his short time at PSP, some telling me he was an "unmitigated disaster" who turned that place upside down, while others saying "he was no worse than Gordon" (Gordon Fyfe who left PSP to become BCI's CEO).

I don't know André Bourbonnais well. Only met him once, he seemed nice but all these people seem nice when you first meet them.

I know he was in the running to succeed Michael Sabia at the Caisse and was a favorite front-runner at one point, but apparently he walked out of a meeting with government officials after refusing their terms and that was the end of that.

There are other candidates apart from André Bourbonnais, however, both men and women.

Among "Leo's short list", I'd include many people like Andrew Claerhout, OTPP's former Head of Infrastructure and Nicole Musicco, IMCO's former head of Private Markets, but there are plenty of others and they can come from within AIMCo (like Dale MacMaster) or from within the the Alberta Teachers' Retirement Fund.

Who knows, I'd even include David Long, the former CIO of HOOPP who is Canada's foremost derivatives expert. With him at the helm,, I'd reinstate a new and improved VOLTS.

All this to say, while André Bourbonnais is a clear front-runner, it's by no means a done deal and this isn't Mark Wiseman's decision, the entire AIMCo board has to back him up (but he carries the most weight).

By the way, Mr. Wiseman has some very strong opinions on what Ottawa needs to do to bolster growth in light of the pandemic and I tend to agree with him but being a conservative at heart, I want to see clear measures of success when it comes to spending taxpayers' dollars.

Long gone are the days of spending for the sake of spending, the Liberals need to prove to me and a lot of Canadians that they are worthy of holding office, and right now, they sure don't have my vote or confidence (quite the opposite, we are on the wrong path).

Anyway, you can follow Mark Wiseman on Twitter here and I assure you he doesn't tweet as much as Trump or yours truly. 

Today, I noticed he will be part of a free virtual event sponsored by the Canadian Club of Toronto featuring Alison Loat, Managing Director of Sustainable Investing and Innovation at OPTrust, Veronica Chau, Partner and Director of Sustainable Investing & Social Impact at BCG and Gerald Butts, Vice Chairman of Eurasia Group.

Join me for the @CdnClubTO's free virtual event on December 9 as I moderate a discussion with Gerald Butts (@gmbutts), Veronica Chau and Alison Loat (@AlisonLoat) on #ESG and #sustainableinvesting.

Register for the free virtual event here: https://t.co/MDSaw1Czmb

— Mark Wiseman (@MarkDWiseman) November 23, 2020

While I'm not a big fan of Gerald Butts (truth be told, I think he and Chrystia Freeland are both lightweights when it comes to making solid long-term policies), I do like Alison Loat and think highly of Mark who is an expert on ESG investing.

These days, things are getting very bubbly in some ESG stocks but the discussion will be more in-depth and they will discuss “greenwashing” and other topics, so mark your calendar for Wednesday, December 9th at noon.

Let me end by wishing AIMCo's CEO Kevin Uebelein all the best and if there's anything he needs to be covered from now until his departure, he knows where to find me.

Below, Mark Wiseman's friend, Blake Hutcheson was the guest at the Empire Cub of Canada on Friday discussing observations and reflections he gained during his first hundred days at the helm as President and CEO of OMERS. Taking on this role at OMERS during the COVID pandemic has given Blake new insights into what it means to lead an organization managing direct investments on five continents, on behalf of its more than 500,000 members. Take the time to watch the clip below.

Also, Dan Kelly, president & CEO of CFIB, joined BNN Bloomberg to discuss Ontario's latest lockdown restrictions and why he believes this is the worst COVID-19 policy he has seen from the government to date. He's absolutely right, Ontario's COVID-19 policy is a travesty, a step above Alberta's asinine policy. Watch it here if it doesn't load below.

Lastly, I embedded a great TED Talk featuring wheelchair athlete Dean Furness. He shares how, after losing the use of his legs in an accident, he discovered a powerful new mindset focused on redefining his "personal average" and getting better little by little. Great talk, take the time to watch this, will give you much needed perspective and he provides great insights on life.

Claude Marchessault, an educator, lawyer and the former executive director of the British Columbia Teachers’, College and Public Service pension plans wrote a comment for Benefits Canada on why he thinks B.C.’s pension governance structure a ticking time bomb: 

For years, a major public sector pension governance time bomb has been hidden in plain sight.

But it may be too late to alert the bomb squad; the coronavirus pandemic and climate change may have already activated a countdown that can’t be stopped.

Investment management is a key component of sustainability and central to any pension governance scheme. Public sector pension funds face increased pressure to deliver higher investment returns so public pension stakeholders can avoid mandatory contribution increases. By definition, this means fund managers must take on greater risk to achieve the higher returns. But in the investment industry, greater risk means increased potential for loss.

The key question is whether those responsible for overseeing Canada’s public fund managers have the requisite legal power and board experience to investigate and redress governance failures that will inevitably arise from increased levels of risk, especially in light of the multitude of investment challenges created by the pandemic and climate change. 

In April, it was revealed that the Alberta Investment Management Corp. lost around $2.1 billion of the approximately $118 billion of pension and trust fund assets it manages. The loss represented about a third of the AIMCo’s 2019 investment income.

In a press release, the organization’s chief executive officer Kevin Uebelein said the difficulties arose from a “bet” on stock market volatility that led to losses because “markets behaved in a manner never before seen . . . .”

The AIMCo’s board of directors launched an internal review, acknowledging that oversight of investment strategies and risk management is a board responsibility and concluded the volatility losses arose from a governance failure. The board quickly adopted changes designed to strengthen the organization’s risk culture, including a more stringent analysis, review and approval process that volatility investments or other derivative-based investment strategies would need to satisfy, including board approval above certain levels of exposure.

The AIMCo is closely aligned with the provincial government, which appoints all directors who must have experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company. However, the Alberta Investment Management Corporation Act places the onus on the board to set strategic direction for the AIMCo and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of its investment management business. From a governance perspective, Alberta has ensured that the AIMCo board has both the legal power and talent to investigate and redress governance failures.

In British Columbia, the B.C. Investment Management Corp. has more than $160 billion assets, with a lay board of seven directors. The chief investment officer, selected by the board, must “supervise the day-to-day operations of the . .  . corporation, including a determination of which assets to buy and sell,” according to the province’s public sector Public Sector Pension Plans Act. In this regard, the board is hemmed in by the act, which states “the . . . board must not be involved in the investment decisions of . . . the corporation.” Hence, investment power within the BCI lies entirely with a single person — the CIO who is selected by a board that’s prohibited by law from considering precisely the work he’s hired to do.

If the CIO’s investments turn sour — he decides to place a losing “bet” on stock market volatility, for example — the board can terminate his employment. But poor investment outcomes have repercussions for years, decades even, and the BCI’s pension fund clients and their beneficiaries would be left holding the proverbial bag.

Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.

The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person. 

I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business. 

While it may be inconvenient to address pension governance in the middle of a global pandemic, it’s precisely because of the multitude of investment challenges created by the current crisis and climate change that now is the correct time to undertake this review. 

Let me first thank Claude Marchessault for connecting with me earlier today on LinkedIn and sending me his comment. 

Claude read my last comment on the early departure of AIMCo's CEO and he reached out to me. 

Before I get into my thoughts on BCI's governance, let me share an important update on my AIMCo comment:

A friend of mine emailed me to ask me: “What about Mark Wiseman? He’d make a great CEO, he’s young, smart and it pays better than being a Chair.” I agree, didn’t think of Mark right off the bat because he’s the Chair but he’d make a great CEO. Of course, if he’s interested in the role, he’d have to step down as Chair and recuse himself from the search committee. 

Also, on Tuesday morning, I received an email from someone who worked at PSP during André Bourbonnais's tenure, defending him against my "unsubstantiated accusation" that he was an "unmitigated disaster" at PSP. 

This person wants to remain anonymous but cited Bourbonnais's many accomplishments at PSP, including beefing up Private Equity significantly, introducing Private Debt as an asset class, opening up international offices and drastically improving diversity at all levels of the organization. 

I think it's only fair that I include all views here. I thank this person for sharing their feedback and no doubt, Mr. Bourbonnais has many achievements and was brought to PSP to expand private markets.

Please note my intention was not to attack André Bourbonnais or Gordon Fyfe or anyone else, just sharing some mixed reviews on his tenure (truth is you will always have different opinions on CEOs, some good, some bad).

I realize some people have different opinions than me, that's fine, but trust me, I always try to be fair and balanced in my comments and when I state things, it always comes from credible sources.

Anyway, let me tackle Claude Marchessault's comment above and I must say, he's very brave to publish it. 

Why? A very close friend of mine who had a senior position at a big B.C. Crown corporation (not BCI) told me: "British Columbia is a beautiful place to live but it's by far the most corrupt province in the country. Every time the provincial government changes, they literally place their people everywhere and start changing all the public services contracts to firms that support them. This goes on everywhere but not to the level you see in B.C., corruption there is rampant and institutionally ingrained."

I must say, coming from Quebec, that shocked me a little but when I spoke to other people living in B.C. not only did they concur, they told me "it's very dangerous speaking out here".

So, I give Claude Marchessault full credit for speaking out publicly, not to mention I'm sure his comment irritated BCI's CEO/ CIO, Gordon Fyfe.

I'll share my thoughts on the "concentrated power" BCI's CEO/ CIO has below but before I do, let me share a comment that was posted by Dennis Blatchford, a former BCI director that was posted at the end of Marchessault's comment on the Benefits Canada website:

I’ve never met the author, but I have served for over 20 years as trustee to one of the BC public sector plans. I also served as director of BCI during the most important 7 years of BCI’s 20-plus years existence. That experience tells me that Mr. Marchessault is misinformed. BCI’s processes are rigorous, they have a culture of excellence, accountability and innovation and they have attracted some of the best talent — both experienced and up and coming — that can be found.

Uniformly, BCI client boards have put forward talented people in their own right and the province has ensured the chair position is filled with a proven, experienced leader.This model ensures the board is not simply a rubber stamp club. I believe the results speak for themselves and have no idea how events in Alberta have anything to do BCI. 

I'm glad Mr. Blatchford posted this because I'm always a little suspicious of people contacting me out of the blue, wondering whether they have an ax to grind. 

BCI's results do speak for themselves, the pension has been managed well since the time of Doug Pearce, and this despite not having a professional investment board made up of experts like they do at other large Canadian pensions like AIMCo, CPP Investments, OTPP, CDPQ, and PSP Investments.

If you go to BCI's website, this is what you will read on the governance of its board of directors:  

Our Board of Directors consists of seven directors who are appointed by our clients and the British Columbia Minister of Finance.

The Board’s accountabilities include: appointing the CEO/CEO (and monitoring and reviewing his performance); appointing auditors; approving policies, our business plan, budget, conflict of interest guidelines; establishing the employee classification system and compensation scale; and overseeing operations.

The Board is legislatively prohibited from being involved in investment decisions. Under the supervision of the CEO/CIO, investment professionals make these decisions, in accordance with policies established by our clients, and those established by the Board. The CEO/CIO is accountable for all investment decisions. 

Importantly, while BCI's board does have important functions and oversee operations, it does not have to approve major investments like other boards do at larger peers.

It states flat out: "The Board is legislatively prohibited from being involved in investment decisions. Under the supervision of the CEO/CIO, investment professionals make these decisions, in accordance with policies established by our clients, and those established by the Board. The CEO/CIO is accountable for all investment decisions."

What I was told, this is a plan design flaw that dates back to Doug Pearce's time when he waqs leading the organization.  

Someone reading that can easily conclude: "Holy crap! Are they nuts giving so much power to the CEO/ CIO? That's a recipe for disaster!"

Indeed, this is the angle Claude Marchessault is conveying in his comment above, but is the right way to perceive things?

Not according to Dennis Blatchford, and not according to me either.

In fact, while Gordon Fyfe appears to have tremendous power as the CEO/ CIO of BCI, the truth is the Board is continuously monitoring and reviewing his performance and not only did they appoint him, they can just as easily fire him if they feel he's not doing his job up to their standards.

"Yeah but Leo, these Board members aren't experts like you, they don't really understand all the risks and complexities of all the investment strategies across public and private markets, so they can easily be fooled."

True, they aren't investment experts but they aren't idiots either. Here are BCI's Board members:

Peter Milburn, the Chair of BCI's Board, is a retired Deputy Minister of Finance and Secretary to the Treasury Board and that tells me he's very sharp. I can say the same of other Board members.

I was told by people who know the Board well that they're not investment experts but they're "very nice and very informed" and they all take their responsibilities very seriously.

Should they be given more power to approve of major investments like Boards do at other major pension funds?

Maybe but I'm not sure this would improve the governance at BCI or that it's in the best interests of all its clients and members.

In my experience, a strong pension Board asks a lot of tough questions but at the end of the day, it has to support senior managers and their investment decisions.

If the Board isn't clear on something, it can always hire outside help to get clarifications.

In his comment above, Claude Marchessault writes:

Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.

The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person. 

I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business. 

Again, BCI's Board appoints the CEO/ CIO and can fire him if he's not fulfilling his duties according to their standards.

And having a Board made up of "highly capable and experienced investment professionals who speak the CIO’s language" doesn't guarantee you will avoid time bombs.

The author notes AIMCo's board of directors is appointed by the Alberta Government and they have to have the requisite qualifications and experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company.

Little did that do for AIMCo when it came to the volatility blowup that cost them $2.1 billion in losses. Where was AIMCo's experienced and highly qualified board before this happened and how come they approved VOLTS?

In my experience, every pension fund has blowups, some are so big that they cannot be hidden from public scrutiny.

The 2008 crisis highlighted the Caisse's massive ABCP exposure and let me tell you, very few in the media covered that blowup properly and that's a story that was buried by very powerful interests (if Quebecers only knew the truth, they'd freak!).

The same goes for PSP's blowup back in 2008. If it wasn't for Diane Urquhart and yours truly, most people would be completely oblivious, and let me tell you, that blowup could have potentially annihilated PSP if Gordon Fyfe didn't step in to shut down that credit portfolio (still took massive losses and if he had listened to me, we both would have featured in a chapter of The Big Short!).

Both the Caisse's ABCP blowup and PSP's CDS blowup were much worse than what occurred at AIMCo back in March, and it represented a massive failure of governance despite having a very qualified board of directors.

Importantly, having a qualified Board doesn't guarantee you will never see another blowup at a major Canadian pension.

That brings me to another point, in Canada we love touting our great pension governance which boils down to three points:

• Separate public pensions from governments, have them operate at arm's length.
• Allow them to pay competitive salaries to hire and retain top talent so they can manage more assets in-house, significantly lowering fees and costs.
• Adopt risk-sharing so the risk of the pension plan is equally borne among retired and active members and the government (jointly sponsored plans).

The third point is smart plan design but the first two are critical to the success of Canada's large pensions.

But these are what I call "high level" governance points, very important to be sure but there is another equally important level which is below the surface:

• Is the board qualified, very informed and engaged?
• Are there clear delineations of duties and accountabilities?
• Who does the Chief Risk Officer report to? The CEO, CFO or the Board?
• Is there a Chief Performance Officer? If not, why not? 
• Are there clear whistleblower policies governing many activities including fraud and harassment? Is the Board made aware by the Chief compliance Officer?
• Does the CEO also carry the CIO hat and is this optimal for the pension and its members?
• Are investment activities reviewed and audited by an independent and highly qualified third party which has the expertise to really understand all the risks and complexities?
  

I can go on and on, I literally wrote a massive report for the Treasury Board of Canada after I left PSP and looking back now, that report is very outdated and needs a complete revamp!!

I know a lot more now than I knew back then, a lot more and can literally write a book on the topic starting again with bogus benchmarks (my favorite topic).

The point is looking at governance at a higher level is like looking at Porsche without peeking into the hood to examine its engine. It might look great but it's really a lemon.

There's a lot of talk of the "Canadian model" but if you ask an expert like me, governance is something you need to always review every year and try to improve on. 

It touches upon a lot of things, including diversity and inclusion. For example, does your pension hire people with disabilities? If not, why not?!?????

Never mind, I know the answer to that last question, it's not pretty, it's downright ugly and discriminatory.

What else? The question of CEO have a dual role of CIO.

I've covered this on my blog somewhere but my thoughts are simple, a great CEO cannot be both, he or she must focus on running the bigger ship and the CIO must be held accountable for all investment decisions across public and private markets and all investments heads should report to the CIO, not the CEO.

In my opinion, the CEO should have as few direct reports as possible: the CIO, Head of HR, CFO, CRO (who should also report to the Board and cannot be fired without Board approval) and maybe a CTO (Chief Technology Officer).

Being a CEO of a major Canadian pension is hard enough, you simply can't do both functions properly.

A CIO needs to be able to look at opportunities across public and private markets and everything in between.

In my opinion, Julie Cays, Ziad Hindo, James Davis, Jean Michel, Dale MacMaster, Eduard van Gelderen, Satish Rai are all great CIOs and they understand their roles very well, focusing purely on investments.

Ed Cass will be a great CIO at CPP Investments but investment heads still report to Mark Machin. Ed will be deciding allocations into asset classes.

Jeff Wendling, the new CEO at HOOPP still carries the CIO title but that's not a permanent thing, he will eventually appoint a CIO after things calm down from this pandemic.

And that leaves Gordon Fyfe at BCI. Gordon always carried both hats, he simply can't relinquish the CIO title. 

Interestingly, after he left PSP, André Bourbonnais appointed Daniel Garant as the CIO, but when Garant joined Gordon at BCI, he wasn't made CIO. Instead, he was made the Head of Public Markets (he should have been appointed CIO in charge of both public and private markets).

But I get it, Gordon Fyfe loves investments, he always did going back years when he used to sit in on the portfolio managers meetings every week at the Caisse (that's where we met).

I don't blame him, CEO carries a lot of weight and there's a lot of pressure and deadly boring things you need to do. Yes, they get the big bucks but they also deal with a lot of stuff that I can't stand. It's much funner being the CIO and getting paid the big bucks (not that it's easy and not full of pressure!!).

I'll wrap it up there but I covered a lot in this topic and I want you to take all this talk of ticking time bomb at BCI with a shaker of salt. 

Can the governance be improved there? You bet. Can the culture be improved there? You bet, twice over! But this talk of an imminent ticking time bomb because the CEO/ CIO carries too much power is pure nonsense, in my opinion.

And who are you? Leo de Bever? No, I'm Leo Kolivakis but you can call me Mr. Pension Pulse!

As far as Claude Marchessault, i thank him for sending me his comment even if he probably regrets it now.

Below, CNBC's Jim Cramer said Tuesday morning that some of the stock gains in the market are "insane," with investors recently buying certain names from Tesla to Royal Caribbean seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them.

A lot of speculative names (AYRO, BLNK, NIO, SOLO, XPEV) got slammed hard today but it doesn't mean much as they're still up huge year-to-date.  

Second, Rob Sluymer, Fundstrat, on whether we're headed higher or lower from here. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Brian Kelly.

Sluymer is very bullish and thinks the next move is higher and he might very well be right but I'd be careful here as these markets can move on a dime.

Listen to Morgan Stanley's Mike Wilson on why he thinks the S&P is running out of gas. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Steve Grasso.

The heads of Canada's eight largest pension funds, collectively responsible for $1.6 trillion is assets, are banding together for a rare joint request, pleading with corporations to beef up their environmental, social and governance disclosures by reporting the data in a standardized fashion.

ESG factors such as diversity initiatives and carbon footprint disclosures, have become crucial investment criteria for institutional money managers in recent years, but the way these companies report these risks and commitments is akin to the Wild West.

To streamline decision-making, Canadian pension fund chief executive officers have worked for the past six months to mutually agree on the best frameworks for companies to use -- those from the Sustainability and Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.

The leaders backing this initiative include the CEOs of the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec, Ontario Teachers' Pension Plan and PSP Investments, which manages the pensions of federal government employees and the Royal Canadian Mounted Police.

Many of the funds have already been vocal about improving ESG disclosure, but the joint request marks the first time all eight have come together. "We're going to have a lot more impact changing behaviors if we speak as eight organizations representing $1.6-trillion," PSP Investments CEO Neil Cunningham said in an interview. 

The initial spark came in May when pension fund heads got together for their biannual meeting with the Governor of the Bank of Canada. In a discussion among themselves afterward, Mr. Cunningham expressed frustration with the "alphabet soup" of organizations that made disclosure recommendations. What the funds wanted, he said, was "a consistent, transparent means of measuring ESG impacts and risks."

Canadian corporations not only lag their U.S. counterparts by a wide margin in disclosing climate risks, according to Montreal-based ESG consultancy Millani, but of those that published a sustainability report in 2019, the disclosures varied widely.

Roughly two-thirds of companies used what is called the Global Reporting Initiative, or GRI, to guide their reporting, according to Millani, while about one-third used an ESG framework from the Sustainability and Accounting Standards Board, or SASB.

The SASB standards, which the pension funds back, were published in late 2018 after six years of research, and they include 77 industry-specific frameworks. They also include climate-related financial disclosure recommendations released in 2017 by the Task Force on Climate-related Financial Disclosures, or TCFD.

The TCFD was created by the former Bank of England governor Mark Carney in 2017, and the organization's goal is to help investors, lenders and insurers understand which companies will endure or even flourish as the environment changes and new technologies emerge, according to its mission statement.

PSP's Mr. Cunningham stressed that tracking such details is crucial for making investment decisions. "Companies that are more involved and understand ESG risks better, and disclose risks better...tend to outperform those that don't," he said. "The ability to identify those outperformers will increase our returns, and then benefit our beneficiaries. This is just smart investing."

The full list of Canadian pension funds backing the request is: Alberta Investment Management Co., British Columbia Investment Management Co., the Caisse, CPPIB, Healthcare of Ontario Pension Plan, Ontario Municipal Employees Retirement System, PSP and OTPP.

Bank of Canada Governor Tiff Macklem is also endorsing the push. "A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it's also the right thing to do," he said in a statement. "Leadership from Canada's financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic."

Maiya Keidan of Reuters also reports Canada pension funds with combined $1.2 trillion under management ask companies to standardize ESG reporting:

Canada’s eight biggest pension funds on Wednesday threw their weight behind global efforts to improve corporate sustainability reporting, urging companies and their investment partners to report environmental, social and governance (ESG) data in a standardized way.

In the first joint statement of its kind, CEOs of the top pension funds, which manage C$1.6 trillion ($1.2 trillion) in assets, demanded increased transparency from companies.

“How companies identify and address issues such as diversity and inclusion, human capital, board effectiveness and climate change can significantly contribute to value creation or erosion,” the statement released by Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board and the Public Sector Pension (PSP) Investment Board and others said.

They asked the companies to use the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures framework to further standardize ESG-related reporting.

BlackRock, the world’s largest asset manager, in October called for harmonized sustainability accounting rules and standards globally.

Earlier this autumn, the International Financial Reporting Standards (IFRS) Foundation said it was looking into standardization and comparability of reporting on sustainability and climate-change issues.

“For us to achieve the objectives of disclosure, we have a louder voice banding together and it’s the first time we’ve done that,” PSP Investments’ CEO Neil Cunningham told Reuters by phone, adding that the eight funds coming together “is more powerful than eight separate voices in the wilderness.”

Other funds that are part of the group include: the Ontario Municipal Employees Retirement System, Healthcare of Ontario Pension Plan, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and Alberta Investment Management Corporation.

Paula Sambo of Bloomberg News also reports that top Canadian pension funds ask for better ESG disclosures:

The heads of eight large Canadian pension funds are pleading with companies to improve their environmental, social and governance disclosure by giving investors “consistent and complete” data.

The leaders backing the initiative include the chiefs of the Canada Pension Plan Investment Board, the Caisse de depot et placement du Quebec, Ontario Teachers’ Pension Plan and PSP Investments, which manages the pensions of federal government employees and the Royal Canadian Mounted Police. Collectively, the funds manage C$1.6 trillion ($1.2 billion) in assets.

“How companies identify and address issues such as diversity and inclusion, human capital, board effectiveness and climate change can significantly contribute to value creation or erosion,“ the group said in a statement.

“Companies have an obligation to disclose their key business risks and opportunities to financial markets and should provide financially relevant, comparable and decision-useful information.”

The funds said they’re committed to strengthening ESG disclosure within their own organizations and to allocating capital to investments best-placed to deliver sustainable value over the long term.

CPP Investments posted a press release stating the CEOs of eight leading Canadian Pension Plan investment managers call on companies and Investors to help drive sustainable and inclusive economic growth:

Today, the CEOs of Canada’s eight leading pension plan investment managers, representing approximately $1.6 trillion in assets under management, are joining forces to help shape a future defined by more sustainable and inclusive economic growth.

For the first time, the CEOs of AIMCo, BCI, Caisse de dépôt et placement du Québec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan, and PSP Investments have issued ajoint statement. Together, they call on companies and investors to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage their collective ESG risk exposures.

The signatories further commit to strengthening ESG disclosure within their own organizations and to allocate capital to investments best placed to deliver long-term sustainable value creation.

The joint statement declares, “How companies identify and address issues such as diversity & inclusion, human capital, and climate change can significantly contribute to value creation or erosion. Companies have an obligation to disclose their key business risks and opportunities to financial markets and should provide financially relevant, comparable and decision-useful information.”

The signatories recognize that while companies face a myriad of disclosure frameworks and requests, it is vital that they report relevant ESG data in a standardized way to provide clarity and improve data flow. They ask that companies measure and disclose their performance on material, industry-relevant ESG factors by adopting the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework.

The statement recognizes the ongoing impact of the COVID-19 pandemic and recent events that have highlighted long-standing inequalities revealing business strengths and shortcomings concerning social inequity, including systemic racism, environmental threats, and board effectiveness. The signatories call on companies and investment partners to seize the tremendous opportunity available at this historic moment to actively take steps to drive lasting change.

“We are inspired by this opportunity to help confront the most urgent challenges facing our global community and create more inclusive economic growth. We encourage other parties committed to our vision to join us on this journey towards a more sustainable future for all,” the statement concludes.

MEDIA QUOTES:

“When you approach investing with a long-term view as we do, sound ESG practices are imperative to achieving strong, risk-adjusted returns. Seeking transparent and standardized disclosures is something we will continue to do, in the best interest of our clients and all Albertans.” – Kevin Uebelein, Chief Executive Officer, AIMCo

“BCI is committed to companies that create long-term value for our clients. Transparency is key, and we need comparable and consistent ESG disclosure to allow us to make informed investment decisions.”  – Gordon J. Fyfe, Chief Executive Officer/Chief Investment Officer, BCI

“Increased transparency and standardized reporting on ESG matters will help investors better assess company risks and long-term performance and ultimately contribute to building a stronger and more sustainable economy for all. We are happy to see all major Canadian pension funds working together in pushing this important initiative forward.” – Charles Emond, President and Chief Executive Officer, Caisse de dépôt et placement du Québec

“CPP Investments is a strong supporter of both the Sustainability Accounting Standards Board (SASB) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). By aligning their reporting with these standards, companies can help global investors like CPP Investments to better understand, evaluate and assess potential risk and opportunities related to environmental, social and governance (ESG) factors.” – Mark Machin, President and Chief Executive Officer, Canada Pension Plan Investment Board

“As a global investor and the pension provider for Ontario’s healthcare workers, HOOPP is committed to sustainable investing. We are proud to be joining other major Canadian pensions in pushing for enhanced and standardized reporting of environmental, social and governance (ESG) information. This pledge is a call to action for both investors and businesses to work together for a better future.” – Jeff Wendling, President and Chief Executive Officer/Chief Investment Officer, HOOPP

“Capital allocation plays a critical role in the transition to a lower-carbon economy. At OMERS, we actively assess risks and opportunities through an ESG filter to identify investments that will generate long-term, stable returns in the context of this transition. Greater transparency and comparability of relevant data is essential to making informed allocation decisions.” – Blake Hutcheson, President and Chief Executive Officer, OMERS

“Our objective is to invest in companies that build a better future for their employees and communities while at the same time provide the appropriate risk-adjusted returns to help us meet our promise to our members. Providing clear guidance to companies on the sustainability frameworks that we support will help unlock the consistent and comparable information we need to make prudent investment decisions.” – Jo Taylor, President and Chief Executive Officer, Ontario Teachers’ Pension Plan

“Our investment approach is anchored in our commitment to act in the best interests of our contributors and beneficiaries. We believe a concerted ESG approach on standardized disclosures will give the industry new insight to inform risk models and investment decisions. At PSP Investments, we are proud to join this initiative.” – Neil Cunningham, President and Chief Executive Officer, PSP Investments

“A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it’s also the right thing to do. Leadership from Canada’s financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic. I applaud the commitment expressed today by Canada’s leading pension plan investment managers.” – Tiff Macklem, Governor, Bank of Canada.

“SASB welcomes the leadership of Canada’s eight largest pension plan investment managers in advancing investor-focused sustainability disclosure. By asking companies to use SASB Standards, along with the TCFD recommendations, this group is helping improve the availability and comparability of sustainability information and contributing to more resilient markets.” – Janine Guillot, Chief Executive Officer, Sustainability Accounting Standards Board

“We applaud these Canadian pension funds for their efforts in contributing to a more resilient global economy. By asking companies to disclose in line with the TCFD and SASB frameworks, they are paving the way for convergence around a common set of disclosure principles and furthering Canada’s leadership in this area.”– Mary Schapiro, Head of the Task Force on Climate-related Financial Disclosures Secretariat and Vice Chair for Global Public Policy at Bloomberg LP

In a statement posted on LinkedIn, OMERS CEO Blake Hutcheson explains the need for better reporting of ESG data​:

Today, alongside our friends at Canada’s leading pension plans, we announced a shared commitment urging businesses to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage collective ESG risk exposures. 

At OMERS, we invest to deliver secure, sustainable returns to our 500,000 members across Ontario over the long term. Applying an ESG lens to the assessment of risk and value is essential to achieving this; for this lens to be truly effective, businesses need to accurately measure and report ESG data.

Currently there is a lack of rigorous ESG data from many businesses globally for investors to adequately inform investment decisions. In order to drive sustainable value for our members, we rely on the transparency and comparability of data that this statement calls for. While companies face a myriad of disclosure frameworks and requests, in our view it is vital that they report relevant ESG data in a standardized way to provide clarity and improve data flow.

We therefore join our peers to urge companies to utilize Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures to provide a common standard for the disclosure of their performance on material, industry-relevant ESG factors.

As we call on businesses to improve reporting of ESG data, we too commit to strengthening ESG disclosure at OMERS and to increasingly allocate capital to investments best placed to deliver long-term sustainable value creation.

CDPQ's President and CEO, Charles Emond, posted this on LinkedIn (translated from French):

Working with Maple 8, Canada's largest pension plan managers, I am pleased that the CDPQ is committed to achieving ambitious sustainability goals, transparently disclosing environmental, social and governance issues, and encouraging industry to do the same. I am convinced that to strengthen our economy and provide a just and inclusive future for all, it is more necessary than ever to work together to address the climate challenge.

I'm not going to go over what every CEO said but the press release above from CPP Investments states their comments.

Take the time to read the joint statement below:

While the SASB standards focus broadly on industry-relevant sustainability reporting, the TCFD framework calls for climate-specific disclosures across several reporting pillars (governance, strategy, risk, and metrics and targets). Both are useful to investors and informative to companies working to frame their ESG reporting.

Alright, what are my thoughts? In a nutshell, I absolutely agree with this initiative and I'm glad Canada's top eight pensions got together to issue a joint statement.

I would have liked to have seen more large Canadian pensions like IMCO, OPTrust, CN Investment Division and CAAT join the top eight but for some reason it was only the top eight pensions.

Regardless, the message and intent behind this push for more ESG disclosure is right on target but now we have to wait and see how companies are going to respond. Most of them will respond favorably, but some will ignore the plea for more ESG disclosure based on well known reporting frameworks (SASB and TCFD).

Beyond climate-related risks, however, the joint statement said it will look at how companies identify and address issues such as diversity and inclusion, human capital, and board effectiveness which can significantly contribute to value creation or erosion.

I'm not an ESG expert but I track one on Twitter, Mark Wiseman, Chair of AIMCo' Board:

According to a new survey by @rbcgamnews, 70% believe adopting #ESG factors can help generate #longterm sustainable alpha, while 87% believe that an ESG-integrated portfolio can also help minimize risk. @BenCanMaghttps://t.co/z5XK1xjq7T

— Mark Wiseman (@MarkDWiseman) November 6, 2020

The world of #ESG keeps on growing – sustainable funds are attracting record inflows this year, as allocators increasingly emphasize ESG criteria, according to @iimag and @MorningstarInc.https://t.co/57c5OXOE5m

— Mark Wiseman (@MarkDWiseman) November 2, 2020

#ESG fund ratings are becoming more popular, with several of the leading ESG data providers having launched their own ratings. However, are #investors adequately scrutinizing the methodology and the data on which these ratings are based? @pensionsnewshttps://t.co/LrHUKWymcL

— Mark Wiseman (@MarkDWiseman) November 12, 2020

In the #COVID pandemic, funds with a strong sustainable focus on #ESG have managed to withstand their toughest test yet.https://t.co/CMj2M9r5jb

— Mark Wiseman (@MarkDWiseman) November 18, 2020

Very interesting article on @Nasdaq about how #financial industry experts argue that the US Department of Labour should not push rules that discourage #ESG issues for #pension plans. https://t.co/mSUNilZQ99

— Mark Wiseman (@MarkDWiseman) November 20, 2020

Join me for the @CdnClubTO's free virtual event on December 9 as I moderate a discussion with Gerald Butts (@gmbutts), Veronica Chau and Alison Loat (@AlisonLoat) on #ESG and #sustainableinvesting.

Register for the free virtual event here: https://t.co/MDSaw1Czmb

— Mark Wiseman (@MarkDWiseman) November 23, 2020

Clearly ESG is all the mania lately and from an investing point of view, I see some speculative mini ESG bubbles out there.

But what Canada's top pensions are asking for here is to standardize ESG disclosure so they can assess companies' impacts and risks and be able to make well informed investment decisions over the long run.

Canadian companies should answer their call, we lag behind others in terms of ESG disclosure and that can jeopardize large companies looking to attract foreign investment. 

Bottom line: it's 2020, we need to tackle ESG in a very standardized, transparent and comprehensive way.

This is especially important if we are to rebuild a more sustainable and inclusive world post-pandemic.

Each part of E-S-G is important. If companies don't take each part seriously, they will jeopardize their long-term growth prospects. 

People are watching, consumers and investors want to support and invest in companies which are taking ESG seriously, so I would take this request from Canada's top eight pensions very seriously. 

Below, a 2018 clip where Martin Kremenstein, head of retirement and ETF solutions at Nuveen, explains how ESG metrics serve as an indicator of quality and can be used as a risk management tool.

Also, six years ago, Chris McKnett made the case for ESG investing, showing how strong financial data isn't enough, and revealing why investors need to look at a company's environmental, social and governance structures. Great clip, think OPTrust's Peter Lindley told me about him. 

Lastly, back in June, AFME hosted a webinar where panelists discussing due diligence and disclosure requirements and practices around environmental, social and governance considerations as well as the challenges and projections within these key areas.

Please take the time to read Mihail's synopsis below on case studies followed by my comments and clips where he delves deeply into today's topic (added emphasis is mine):

This week, we continue our journey into the various practical uses of the Total Fund Management ("TFM") framework and process to solve real-life problems related to total fund decision-making. Before we proceed with the topics today, let us summarize the key takeaways from Episode 5.1.

Key takeaways from the first set of case studies in Episode 5.1 last week

Last week, we looked at the first set of case studies focused specifically on expected returns and their term structure. Expected returns and the term structure are not only the core capability of the integrated TFM but are also central to any total fund decision-making.

As such, before reviewing specific aspects of TFM decision-making, it is instructive to understand better what differentiates the concept of the Term Structure of Expected Returns ("TSER") from the more mainstream textbook definition of expected returns. How is the TSER derived and the informational content's value to further improve decision-making and portfolio outcomes?

In Case Studies 1 through 3, we first demonstrated that the expected returns and the term structure vary significantly through time, compared to the static (hence, the title of the case study referring to the "flat earth" analogy) expected return version typically used for strategic asset allocation. Furthermore, the expected returns of the various maturities within the term structure also vary significantly over time. In other words, the TSER continually changes its shape. It changes its slope, flattens, inverts, changes its curvature and even twists. All this is excellent news because, as in life, change means opportunity in the world of expected returns.

Change alone, however, is not enough to lead to opportunities. As in real life, one needs to have the potential and the knowledge, and timing (and luck, I have to admit), to rise to the opportunities. Similarly, even if expected returns change if there is no informational content (think of it as "knowledge") in these expected returns, that could translate into actionable and profitable portfolio decisions.

There are two keywords in the notion above: "informational content" and "timing." Even if there is informational content in the expected returns about the subsequent realized returns, this might be of little use because everybody might be quickly exploiting the informational content advantage. As such, we further tested the value of the TSER using a realistic portfolio-testing approach. We concluded that the expected returns and the term structure contain informational content. This information content could be further transformed into meaningful excess returns (enough "timing" effect). 

Also, regarding the informational content, the process that generates the expected returns is a unique source of value-added because it is mostly similar to the way global macro hedge funds process information and further develop investment strategies. Another aspect was that combining multiple horizons (effectively, using the term structure) instead of using a single horizon leads to a notable improvement in the outperformance.

In simple words, this means that using the combination of short-, medium- and long-term expected returns to manage the short-term is superior to using just short-term returns. Similar conclusions also support the use of absolute and relative expected returns (what matters is not the absolute number, but which asset class performs better than which). We also concluded that the expected returns term structure is best identifying vulnerable markets and, together with the global macro type of a process, exhibit definitive risk mitigation characteristics, which are very well suited for using dedicated risk mitigation processes.

All the insights from the case study confirmed the central role of the TSER for the ability to manage the short terms to improve long term outcomes. As the avid readers of this series would know, the long-term is a series of short terms in the presence of liabilities. Managing these short terms is an integral part of wealth maximization, a key outcome for pension sustainability. As part of the case studies, we also demonstrated the process of deriving the expected returns. 

Importantly, this is not a "black box," but rather, a "white box" method that uses theory and time tested approaches combined with new alternative data sources. We emphasized the importance of an integrated process to start with, in addition to any advanced techniques that might be used, such as machine learning and artificial intelligence, due to the multiplicative network effect of achieving optimality in multiple connected total fund processes. Such an integrated process, supported by the TSER, is central to the core TFM capability and ultimately leads to achieving the economies of scale over the long term.

The above means that even if one does not have the most advanced approaches yet, instituting an integrated process that leads to multiple optimal decisions for the various parts of the total fund process ultimately translates into improved outcomes. I am tempted here to cite the Law of Transformation of Quantitative into Qualitative Changes. A change in an object's quality occurs when the accumulation of quantitative changes reaches a specific limit, first formulated by Hegel and later creatively used by Marx and Engels.

Episodes 5.2 and 5.3 case studies

Understanding better the expected returns and their value opens up the way to continue the journey and look at various practical uses of the TFM framework for various total portfolio decisions at the investment committee ("IC") or by the chief investment officers ("CIOs"). Many of the case studies in Episodes 5.2 and 5.3 are inspired by actual real-life challenges and experiences and are common topics of interest and long conversations among investment professionals.

Case Study 5—Rebalancing Decisions: The Nexus of Multitude of TFM Decisions

Our first case study today is about rebalancing decisions. Of all total fund activities, rebalancing is probably the one that is linked to most aspects of TFM, such as asset allocation decisions, risk decisions, leverage and liquidity decisions, private versus public asset classes, to name a few.

More importantly, one can view rebalancing as a "mini-TFM" not only because it incorporates typical TFM decisions but also because it requires these decisions to be consistent and coherent with each other. While one could rebalance the portfolio in a heuristic manner, a well-thought rebalancing process prompts the ability to consider short- and medium-term expectations about assets, market environments, cash flows, liquidity, and balance sheet decisions. At the center of all these decisions is the TFM framework and process (see the reference from previous Episode 4 here: Rebalancing and TFM framework).

While many decisions need to made regarding various aspects of rebalancing, in Case Study 5, we focused on the following primary decisions: (i) to rebalance or not; (ii) to increase or decrease liquidity and equitize cash; (iii) how to use the TSER for rebalancing, and (iv) optimal rebalancing trades given the TSER and tracking error ("TE").

To better understand the rebalancing decisions and the role of the TFM framework and core capability (the TSER and the risk matrices; for more discussion, please refer to the previous Episode 5.1 here: Core TFM capability), it is required to understand the critical steps of a rebalancing decision process. To do this, the case study briefly walks the audience through the main types of rebalancing (calendar, fixed-bands, and tracking-error), as well as the rebalancing process and methodology.

Notably, the core TFM capability is at the core of most rebalancing methodology inputs related to cash flow projection, how to rebalance private assets, risk, correlation, and transaction cost inputs, as well the ability to include the short- and medium-term expected returns (the short part of the term structure in the rebalancing decisions), the risk matrices (macro and market conditions) and scenario analysis as illustrated below.

Using the insights from the risk matrices allows for making the critical decision to rebalance or not. Rebalancing is an optimal decision only in specific market conditions when the environment is not either risk-on, or very bullish, or risk-off, or very bearish. In these conditions, it is better to postpone rebalancing. As you recall from the previous Episode 5.1, risk matrices are derived from the assets' expected returns and reflect the agreement across different asset classes, geographies, capital structure, and capitalizations about the prevailing market environment in the short and medium-term.

Risk matrices also inform the critical decision to increase or decrease the overall liquidity following a disciplined market environment-linked process. Effectively, as the market environment deteriorates, one increases the percentage of liquid assets as per a specific schedule, and vice versa, in strong markets, excess liquidity needs to be equitized to maximize the utility of the assets. Finally, if one has any insight into the short- and medium-term expected returns, one will make different rebalancing decisions. In such a case, the rebalancing would yield materially better results than the industry standard practice of ignoring any expected returns when performing fixed-band rebalancing (or the various permutations of it) or tracking-error rebalancing. If you recall from Episode 5.1 and the summary, the expected returns have informational content that could be further transformed into portfolio outperformance.

This is a relatively comprehensive case study, and the discussion above is just a brief outline. The case study's insights are drawn from years of experience and actual implementation of such a process and provide a detailed guidance wealth of examples in the complete video presentation.

Case Study 6— Balance Sheet Decisions: Ensuring optimal adequate resources for current operations and financing future growth

Our next case study is about using the TFM framework and its core capability for various balance sheet decisions such as leverage, liquidity, use of derivatives and contingency. The topic of balance sheet management (unduly) receives fewer headlines than other trendier topics. However, understanding its role and scope is the first step toward realizing that it is a critical requirement for the portfolio's success today and tomorrow, and second, balance sheet decisions are deeply interweaved in the total fund decisions. Importantly, it is not only that such decisions need to be coherent and consistent. Having the TFM framework (itself already coherent and consistent) allows for making many balance sheet decisions. The presentations further shed light on the various decisions related to each of the balance sheet elements (leverage, liquidity, use of derivatives and contingency).

To further illustrate the intersection of TFM and balance sheet management, the case study provides a real-life example where a decision to rebalance Emerging market equities is compared to the desire to enter a total return swap, which pays a risk-free premium for the fund. Should the CIO rebalance or collect the total return swap premium? How to make and account for such a decision? While the question is undoubtedly essential and might have created opposing views at times, it might seem "too practical." Let me assure you that is not. Because precisely through such practical situations, more significant and broader issues resurface.

The first one is the ability to illustrate an example of the "hidden costs" that we discussed at length in Episode 1 and the ability of TFM to bring the economies of scope and second-order efficiencies. You have to watch the presentation but let me give you a snippet of it: in the case study, the fund could have sacrificed 10-15% loss for the client to gain 180 basis points of risk-free alpha.

This "hidden cost" might be an issue on its own and highlight even more significant possible governance and performance evaluation challenges.Because ultimately, TFM is not only an efficient and decision process but also an important governance tool.This governance aspect of TFM is to evaluate decisions and adequately account for these decisions and their consequences, properly communicate internally and with the stakeholders, and have the feedback loop to reevaluate prior strategies and decisions and adjust.

Case Study 7— "Dry Powder" Deployment: A decision that separates exceptional from average

Given the significant market move and dislocations, "dry powder" deployment is often mentioned in various publications. And rightfully so because such decisions could indeed separate exceptional from the average performance. An excellent example of this would be the difference in the performance of the various vintages of private equity funds around significant events and, even better, the timing and performance of strategies and funds related to distressed assets and credit.

That said, "dry powder" deployment decisions would often be ad-hoc by their very nature. As such, having an additional ability to complement the decision by supporting relative expectations about assets and these expectations through time would be beneficial to the process. The TFM core capability, and the expected returns and their term structure provide a direct ability to make such "dry powder" decisions – not only in which asset classes to deploy the capital but also the deployment plan (timing, expected levels, as well as exit conditions if expectations do not materialize). In the case study, we provide a concrete example, an extension of the previous rebalancing and balance sheet case studies, to illustrate the process and how to think of the specific decisions around it.

Case Study 8— Leverage Decisions: Which assets to lever and when?

Leverage decisions are part of the overall balance sheet management and are interrelated to many aspects of TFM – liquidity, rebalancing, risk mitigation, to name a few. Several questions need to be answered: which assets to lever, when to lever, what type of leverage to use, what should be the duration term of this leverage, and pricing. There is also the aspect of where such decisions are made –at the asset class level or the total fund level.

Outside specific leverage uses (e.g. achieving alignment with partners at the asset level, for example, or even higher level asset-liability considerations as in the LDI approach or similar), generally, the market environment in conjunction with what assets are being levered matters for the leverage decisions. Put bluntly, levering risky assets in bad market conditions would magnify losses. Levering bonds or other negatively correlated assets (to the extent these exist) would act as risk mitigation. Leverage also has a term, so it is also essential to consider both near-term and short-to-medium-term expected environments. This points to the conclusion about the value of assessing the alignment of market conditions and horizons we talked about in the previous case studies. Another aspect of the leverage decision is that it is only worth levering (unless there is some other specific reason) when the asset returns are higher than cash. Also, all else being equal, assets with higher relative returns are better to lever. Of course, there could be many reasons, implementation, availability, etc., why other decisions could be made.

It is also vital to ensure that the leverage's economical intent is correctly transformed in the performance measurement and evaluation output from a governance perspective. For example, implementing total portfolio leverage does not end up being accounted for as an asset class leverage, thus creating unintended consequences for the asset class performance while "doing" good for the overall portfolio. Of course, there is also the element of adequately accounting for leverage in the benchmarking and the performance evaluation. This could be a problem in portable alpha and similar strategies where the effect may not be directly observable or embedded in other structures. A proper risk-adjusted evaluation is then required to capture the overall impact without overly-complicating the benchmark process.

Combining the answers to the decisions about the market environment, the considerations about the timing, and the assets then lead to determining how to implement the leverage: whether recourse or non-recourse, asset-level or a total portfolio, and the technology behind it – repos, commercial paper or medium-term notes, or some form of asset-back financing, as well as any aspects related to contingency financing (e.g. credit facilities, and the ability to de-lever in a timely fashion).

Finally, there are also considerations about the organization's credit rating requirements and marketplace participation and reputation.

As you probably already deduced from the discussion above, the TFM framework and core capability provide the necessary toolbox to make direct decisions or support implementation considerations – assessment of short- and medium-term market conditions, absolute and relative expected returns and the returns vs. cash over multiple horizons. In the case study, we use specific examples to consider what assets to lever, what environments to lever, and the timing and, by extension, the implementation considerations.

Case Study 9— Deal Pipeline Management: Important part of the rebalancing process

Given the number of private assets in pension funds' portfolios and the constant flow of transactions, it is surprising how, in many instances, there is no specific deal pipeline management process. This process is often done in isolation, driven by the private asset classes as the deal moves through the various stages until closing.

However, to many, it might be surprising that deal pipeline management is at the intersection of private asset classes, liquidity, rebalancing, and currency decisions. While some decisions might be right in isolation (again, this notion of local optimality), there are resulting impacts that may or may not be optimal to the total portfolio (global optimality). This is yet another potential source to minimize the "hidden costs (the unexpected and undesired, or unmanaged outcomes).

In the case study, we use a fictitious private equity transaction within a broader rebalancing process and demonstrate how critical decisions could be made using the core TFM capability.

Case Study 10— Private Assets and Hedge Funds: What if we focus on RETURNS while still thinking of RISK?

Private assets are always a problem in institutional portfolios because it is difficult to treat them in a unified framework. Many of the discussions about private assets are about how one can measure these assets' risks and aggregate these risks in a total portfolio context. How about we turn the conversation to returns, not risk? How can we use the TFM framework and process to decide the private assets, and by extension, hedge funds?

This is again the topic of the economies of scope. Doing TFM right gives us the ability to manage many other things, including private assets and hedge funds. It is not only about allocation decisions (to invest or not, and when) but also a myriad of other decisions such as leverage, liquidity, rebalancing, "dry powder" deployment, hedging, valuation and performance measurement. In the case study, we demonstrate how one can convert the expected returns and their term structure for private asset classes and various hedge funds categories. Everything we said so far about public asset classes and all the various decisions could now be applied to private asset classes and make decisions for the portfolio's totality, without excluding private asset classes.

If you recall, in Episode 5.1 Case Study 2, we showed an actual implementation of expected returns at different horizons across a multitude of asset classes, sectors, capital structure, capitalizations and factors in real-time. Imagine if one can add to this all the private asset classes and hedge funds, this would be a compelling, integrated, coherent and consistent, TFM framework. Following the case study, we also provide a list of possible applications for allocation and cash flow and liquidity decisions.

Case Study 11— Risk Mitigation: Not for its own sake but as part of the TFM process and decisions

So far in the series, we have been mentioning risk mitigation in different contexts but never explicitly focused on it. We talked about risk mitigation as one way to maximize wealth and the" cruel math" that downside protection matters more than upside growth. We also pointed out that managing adverse outcomes becomes increasingly crucial for pension clients due to the combination of cash outflows and market conditions. We also discussed the management of the path of returns as a form of risk mitigation. As part of the case studies, we demonstrated that the signals behind the expected returns and the term structure are similar to a global macro hedge fund process and can identify vulnerable markets – all of these being risk mitigation characteristics.

The immediate focus of risk mitigation is liquidity and contingency, with questions about rebalancing and "dry powder" waiting in line. However, when the dust settles, it is ultimately all about the possibility of contribution rate increases, one of the critical pension sustainability outcomes.

Is risk mitigation only about the markets, or are there other ways to look at it? As part of the presentation, we put forward the idea of managing risk mitigation and view it as a combination of structural and market sides.

The structural side is related to the embedded risk mitigation properties via the actuarial smoothing and surplus, and we describe in detail the benefits and challenges of these. The market risk mitigation is related to the elements of portfolio construction and related to the ability to de-risk/increase bonds, increase private assets, or use various portfolio construction methodologies (risk parity, targeted volatility, among others), including the path-dependent allocation approach we have been focusing on in the series. In addition to the portfolio construction aspect, there is also the dedicated risk mitigation strategies approach. We specifically use a dynamic (conditional) risk mitigation to illustrate the risk mitigation's impact on the funding ratio and its specific properties.

There are challenges to market risk mitigation as well. Because the bonds are no longer the same hedging asset they once were (low level of yield, correlation, less efficiency in a fiscal policy setting, extreme valuations, low "dry powder," etc.), investors need to rethink the portfolio construction.

A natural inclination would be to increase private assets and alternatives, and these do help, primarily because of the accounting mark-to-market diversification. Still, there is a limit to how many private assets a portfolio can have, and this limit is dictated by liquidity and in relation to the liabilities. Most funds are at the 40% privates mark, so there is a bit more room to expand but not much. As one approaches, the 50% liquidity starts to break (of course, this depends on individual fund circumstances).

So, what is left are two other approaches to complement the hedging properties of bonds?

First, to adopt path-dependent outcome-oriented portfolio management (which is what TFM is; it is meant to avoid adverse outcomes and maximize end wealth (what we care about, not returns). Another way to avoid adverse outcomes and maximize wealth is to have a dedicated and dynamically managed multi-asset asset class called "risk mitigation" and have it as a line in the policy portfolio to complement bonds. This is an outcome-oriented asset class and not an asset-based one.

Most importantly, structural mitigation does not provide dry powder. This is important because if the portfolio dollar size becomes $100 to $80 dollars, even if one does the heroic thing of rebalancing, the weights are right, but the dollars are not. One still has an $80 dollar portfolio. What is needed is something that will give a dry powder to give back the $20 lost. It then self-destructs but fulfills its function.

Based on the discussion so far, we provide a guide for evaluating potential risk mitigation instruments and strategies.

Finally, we conclude the topic with two short case studies showcasing the value of the TFM process and framework as part of designing a global macro capability as part of a broader risk mitigation solution, and an example of how to use the expected returns and the term structure for pricing the value of protection.

Overall Episode 5 Takeaways:

• 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 the complete Episode 5. 

Next Thursday will continue with Episode 6. We will talk about actual real-life implementation and capability – the nexus of organizational structure, methodology and technology. 

***

I thank Mihail Garchev for writing another great comment.

After reading it, I decided to change the title to "Doing TFM Right" because that's what he provides you, concrete examples and deep insights on how to do total fund management right.

I'm not going to go into a deep analysis of everything Mihail wrote above, mainly because I received a phone call from an old friend late this afternoon and we ended up chatting quite a bit, catching up.

But the other reason why is because Mihail lays it all out very nicely above going over economies of scope and how doing TFM right gives pension fund managers the ability to manage many things, including private assets and hedge funds. 

As he states:

It is not only about allocation decisions (to invest or not, and when) but also a myriad of other decisions such as leverage, liquidity, rebalancing, "dry powder" deployment, hedging, valuation and performance measurement. In the case study, we demonstrate how one can convert the expected returns and their term structure for private asset classes and various hedge funds categories. Everything we said so far about public asset classes and all the various decisions could now be applied to private asset classes and make decisions for the portfolio's totality, without excluding private asset classes.

What else caught my attention. At the end when he discusses risk mitigation and states this:

There are challenges to market risk mitigation as well. Because the bonds are no longer the same hedging asset they once were (low level of yield, correlation, less efficiency in a fiscal policy setting, extreme valuations, low "dry powder," etc.), investors need to rethink the portfolio construction.

A natural inclination would be to increase private assets and alternatives, and these do help, primarily because of the accounting mark-to-market diversification. Still, there is a limit to how many private assets a portfolio can have, and this limit is dictated by liquidity and in relation to the liabilities. Most funds are at the 40% privates mark, so there is a bit more room to expand but not much. As one approaches, the 50% liquidity starts to break (of course, this depends on individual fund circumstances).

With long bond yields at record ultra-low levels, it's more important than ever to understand the benefits of diversifying into private markets, but also understand the limits, respecting liquidity needs/ risks.

Investors are rethinking portfolio construction and realizing diversifying into private markets in a record low bond yield environment isn't enough, you need the right approach, the right partners, the right platform, etc.

Anyway, take the time to watch the episodes below, they're both excellent and we should all thank Mihail for the incredible work he's done putting this important series together.

Below, Episodes 5.2 and 5.3 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. Great stuff, please share these comments with your network.

Stocks rose on Friday as traders wrapped up a strong week amid decreasing political uncertainty and positive vaccine news.

The S&P 500 gained 0.3% to end the day at 3,638.35, notching a record closing high. The Nasdaq Composite advanced 0.9% to 12,205.85 and also closed at an all-time high. The Dow Jones Industrial Average closed higher by 37.90 points, or 0.1%, at 29,910.37. Friday’s session ended at 1 p.m. ET.

The Dow and S&P 500 rose 2.2% and 2.3%, respectively, for the week. The Nasdaq, meanwhile, posted a weekly gain of nearly 3%. Earlier in the week, the Dow jumped to an all-time high, breaking above 30,000 for the first time and hit an all-time high. 

“What we’re witnessing today, this week and this month, is a continuation in the rise of optimism,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “The environment for risk assets has been getting better and better” as drugmakers release more positive Covid-19 vaccine data and the risks on the political front ease.

The Cboe Volatility Index (VIX), Wall Street’s preferred fear gauge, briefly dipped below 20 on Friday for the first time since late February. It later rebounded to trade at 20.84.

Retailers led the early gains as investors bet on a strong holiday shopping season. The SPDR S&P Retail ETF (XRT) rose 0.9% and hit an all-time high. Etsy shares popped 10.7%, and Gamestop advanced 9%. Amazon shares gained 0.3%, and Shopify climbed 1.5% after Adobe Analytics said Thanksgiving Day online sales rose to a record $5.1 billion.

Also helping sentiment were comments from President Donald Trump, who said he would leave the White House if the Electoral College votes for President-elect Joe Biden.

“Certainly I will. Certainly I will. And you know that,” Trump said. He added, however, it would be hard for him to concede because “we know there was massive fraud.” Trump did not offer any concrete evidence of widespread voter fraud, however.

Historic month for stocks

Friday’s gains added to the market’s surge this month, which was sparked in part by a slew of positive coronavirus vaccine trial data.

Earlier In November, Pfizer and BioNTech said their vaccine was more than 90% effective. Moderna also said its drug was highly effective in a trial.

That data helped push the Dow up 12.9% in November, putting it on track for its biggest monthly gain since January 1987. The S&P 500 and Nasdaq are up 11.3% and 11.9%, respectively, in November. Meanwhile, the small-cap Russell 2000 is on track for its best month ever, up about 20%.

November’s sharp gains were led by beaten-down value stocks as the positive vaccine news sparked hope for a strong economic recovery.

The iShares Russell 1000 Value ETF (IWD) is up 14.6% this month. Its growth counterpart, the iShares Russell 1000 Growth ETF (IWF), has gained 10.1% in that time.

“As we inch closer to that ultimate health solution ... we’re starting to see market participation broaden out and rotate into some of the more impaired sectors through the course of this pandemic,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “As we turn the coroner, that is going to allow pent-up economic activity to return.”

Tiff Macklem brushes off accusations the Bank of Canada is financing Justin Trudeau’s deficits, but acknowledges there are limits to how much government debt it can buy https://t.co/opWlXMdWAS

— Bloomberg Australia (@BloombergAU) November 27, 2020

I have a lot of respect for Tiff Macklem but I think David Rosenberg set the record straight on monetizing federal debt:

So the BoC's Tiff Macklem told a parliamentary committee that he isn't funding Ottawa's massive deficit. So please, educate us. Since March, the BoC has added more than C$200 billion of GoC debt to its balance sheet to C$327 billion... oh, only a 220% surge.

— David Rosenberg (@EconguyRosie) November 27, 2020

Anyway, despite record low rates, central bankers are now more involved than ever in keeping the economy/ financial system afloat.

Had a chat with a friend of mine earlier about "central bank communism" and he raised a good point, "What is the end game?They're going to monetize all this debt and then governments will cancel it?"

We basically concluded with rates at record low levels, central bankers across the world will do whatever it takes to support asset inflation and housing inflation, hoping it will translate into real sustained inflation (spoiler alert, it won't. it's just sowing the seeds of the next deflationary disaster).

Amazingly, some in the media think central bankers should be paid big bonuses like Wall Street pros for delivering "big returns":

If Japan’s central bank governor were a Wall Street investment manager, he would be in line for a bonus after his excellent timing of big stock buys https://t.co/WCigRX0rdx

— Real Time Economics (@WSJecon) November 27, 2020

Love the part of "some think he shouldn't play the market so much."

Interestingly, when the Bank of Japan took its controversial equity-buying program deeper into uncharted territory back in March, doubling its annual purchasing target to ¥12tn ($112bn) while also rolling out a new lending facility, some thought the the BoJ had "effectively reached the limit of monetary accommodation."

Little did they know how successful this program would be. That's why some think the Federal Reserve will eventually follow suit, buying stock ETFs as part of a QE program.

Of course, the expectations of the Fed backstopping markets at all cost aren't unfounded and if you really think about it, why own bonds if you know the Fed and other central banks will keep pumping trillions into the system to support risk assets?

In fact, if this year taught us anything, short of a global nuclear meltdown, keep buying stocks, the Fed and other central banks stand ready to do whatever it takes to keep inflating the bubble.

Like my buddy stated earlier: "Even if stocks get clobbered 30-40%, you know central banks will step in, so over the long run, you're better off investing in stocks."

And not just any stocks, growth and highly speculative stocks. Sure, you'll need to live with crazy volatility and get dinged from time to time, but you'd be stupid not to keep going out on the risk curve.

In fact, this has been the same message since 2008, stick with stocks, especially growth stocks, you'll trounce returns from Treasuries but you'll need to accept crazy volatility.

The Fed is meeting on December 15 & 16 and although some Fed watchers are expecting an easing before this meeting, I'm not so sure.

If the Fed stays put, it might unnerve these liquidity-driven markets, so that's a meeting you need to pay attention to as everyone gets giddy about stocks making record highs all over the world.

Of course, any pullback in stocks, especially tech stocks, will be bought hard.

"There's too much money out there looking for returns."

True, but when everyone jumps on the same bandwagon, that's when things become dangerous.

On that note, some people are asking me how low can the VIX go, and I reply a lot lower:

Nobody really knows, I'm prepared for anything over the next three months, a melt-up or meltdown, but looking at the way some highly speculative stocks are trading, I'd say there's little fear of the Fed taking the punch bowl away.

Check out three stocks I've been tracking lately:

Despite the pullback today, these stocks have been in beast mode lately, surging higher and higher, and they're all up huge this year.

I discussed Palantir (PLTR) last week when I went over top funds' Q3 activity. 

Elite hedge funds can't get enough of tech stocks, mega cap, small cap and everything in between. 

Why not? Central banks are injecting trillions into the financial system, so it's risk on baby!

The global risk on trade has hammered the US dollar but I happen to think it's a big buy here:

Is the US Dollar about to break? #USD Index (#DXY) pic.twitter.com/Tw9ADWS6do

— jeroen blokland (@jsblokland) November 26, 2020

Why? Things are getting too bubbly out there, risk isn't being priced in right, there's way too much speculative activity but admittedly, it can go on longer than you think.

Today, QuantumScape (QS), a battery developer for electric vehicle use, began trading on the New York Stock Exchange following a SPAC merger. Shares of the San Jose-based company closed up 57%:

Just look at the juggernaut in this space, Tesla, where the market cap eclipsed that of Berkshire today:

Boom!

Tesla has just surpassed Berkshire Hatahaway in market cap at just over $550 billion. pic.twitter.com/hmwp13Samv

— Brian Roemmele (@BrianRoemmele) November 27, 2020

Of course, we shall see how long this will last:

Berkshire Hathaway back in 1999 was also laughed at as being old economy as tech stocks with absurd valuations were called a new paradigm. https://t.co/psIOpgYD53

— Thomas Thornton (@TommyThornton) November 27, 2020

But with central banks going all in, it can last a lot longer than you think, which is why speculation remains hardy and some stocks continue to defy gravity and keep zooming higher and higher:

Zoom shares have soared 552% in 2020—an astonishing gain given it was a highflying stock even before the pandemic https://t.co/aro6OYiCnL

— MarketWatch (@MarketWatch) November 27, 2020

To whomever it may concern: Short interest in S&P 500 stocks continues to hit new lows: pic.twitter.com/Br0SiKyCX4

— Ronnie Stoeferle (@RonStoeferle) November 27, 2020

And no doubt about it, this is a November for the record books:

November @markets so far:

- Dow up 13%, passes 30k, best month since 1987
- Russell 2000 up 20%, best month EVER
- S&P energy up 37%, best month EVER
- S&P financials up 19%, best month since 2009
- S&P industrials up 18%, best month EVER

— Sarah Ponczek (@SarahPonczek) November 24, 2020

Best EVER! Maybe it's also the best time EVER to start shorting this pig of a market, but I'm not sure there's a vaccine for stupidity:

Why Moderna and Novavax Shares Are Racing Higher Today https://t.co/j6m3Z4Ud4u

— Leo Kolivakis (@PensionPulse) November 27, 2020

US #equities: Market capitalization to US Nominal #GDP. pic.twitter.com/pq0repioLP

— jeroen blokland (@jsblokland) November 27, 2020

"Over one-third of Americans say they live in households where it is difficult to afford household expenses, including food, rent or mortgage, and student loans — the highest share in six weeks..."https://t.co/QmJ0f74dN4

— Nomi Prins (@nomiprins) November 27, 2020

And that never ends well.

Alright, let me wrap up this November to remember. Here are this month's top-performing sectors:

This becomes even more evident when you look at the top performing small cap stocks this month:

Bonds? Who needs bonds when central banks are backstopping this liquidity madness?

Below, CNBC's Jim Cramer said Tuesday morning that some of the stock gains in the market are "insane," with investors recently buying certain names from Tesla to Royal Caribbean seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them.

Second, Rob Sluymer, Fundstrat, on whether we're headed higher or lower from here. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Brian Kelly.

Sluymer is very bullish and thinks the next move is higher and he might very well be right but I'd be careful here as these markets can move on a dime.

Third, Morgan Stanley's Mike Wilson on why he thinks the S&P is running out of gas. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Steve Grasso.

Lastly, CNBC's Kelly Evans discusses markets as the Dow hits a milestone 30,000 with Rebecca Patterson, director of investment research at Bridgewater Associates. Listen carefully to her comments.

Private equity firm Cinven and British Columbia Investment Management Corporation (BCI) have reached an agreement to purchase legacy acquirer, Compre, from existing shareholders CBPE Capital LLP, Hudson Structured Management Limited, and Compre’s management.

Following the transaction, Cinven and BCI will become majority shareholders alongside Compre’s management team, led by Chief Executive Officer (CEO) Will Bridger, and will provide the additional capital needed to meet the company’s ambitious growth plans.

Under the ownership of CBPE, Compre completed 21 transactions in 10 jurisdictions, including its first in the U.S., which ultimately enabled it to establish its Bermuda legacy platform.

Commenting on the deal with Cinven and BCI, Bridger said: “I am delighted to announce that Compre will be working with Cinven and BCI as our new majority shareholders to realise our ambitious plans for the future. Compre has a long history in the legacy market built on a client-centric approach that sets us apart. Our reputation for providing bespoke solutions to our clients and for delivering shareholder value has enabled us to establish a company with tremendous potential that I am privileged to lead. My thanks to the CBPE team for their support since 2015.

“In Cinven and BCI, we have partners that share our values and ethos, and our approach to achieving sustainable growth over the long-term. I very much look forward to working with them and leading Compre in what promises to be an exciting time for our business.”

As the global non-life insurance run-off market continues to grow at a steady pace, Cinven and BCI, one of Canada’s largest institutional investors, believe that Compre is an attractive investment opportunity based on the firm’s high-quality, cash and capital-generative business model; and its strong and established market position in Europe and, more recently, its expanding market position in the U.S., with further plans to enter the Lloyd’s market in the future.

Cinven and BCI also highlights the legacy acquirer’s track record of acquiring and managing non-life legacy business over more than three decades; its proven financial track record of steady and consistent growth in recent years; the huge opportunity to capitalise on the growing demand for legacy solutions; and an exceptional management and leadership team.

Cinven Fund’s previous investments in the European insurance segment include Guardian Financial Services in the UK; Eurovita in Italy; and Viridium in Germany.

Earlier this month, Cinven announced an agreement to acquire insurance brokerage, Miller.

Partner of Cinven, Luigi Sbrozzi, commented: “Cinven is delighted to be investing in Compre alongside BCI. Over the last 30 years Compre has built a proven platform in the highly specialised insurance and reinsurance run-off market, and a reputation amongst its clients for consistently creating and realising value. Compre is extremely well placed to access new growth markets, such as the US and Lloyd’s, and to broaden its client offering further. We look forward to working with Compre’s management team to deliver these growth opportunities, drawing on the deep expertise of the Cinven team in the insurance sector.”

BCI has previously made numerous investments in financial services firms, including Hayfin Capital Management, Verifone, and BMS Group.

Jim Pittman, Executive Vice President & Global Head, Private Equity, BCI, said: “We are impressed by the quality of the platform built by Will Bridger and his team and are excited to partner alongside Cinven to support the continued growth of the business. BCI’s investment in Compre follows as a result of our proactive, sector focused origination strategy and relationship building efforts with the company. We look forward to supporting Compre in its development and in turn providing attractive and stable long-term risk-adjusted returns for our pension plan and insurance fund clients.”

Bridger added: “This has been a historic year for Compre. We completed our first US transaction, launched our Bermudian reinsurer and now, subject to regulatory approval, have new shareholders supporting further growth of the business. This was made possible through the commitment of everyone at Compre and our drive and determination for what we do. The legacy market is on an exciting trajectory and, together with our new shareholders, we will be best placed to deliver the ambitious plan we have for Compre.”

Financial details of the deal have not been disclosed, with the transaction expected to close in the second-quarter of next year, subject to regulatory approvals.

BCI put out a press release earlier today announcing the transaction:

Cinven, an international private equity firm, and British Columbia Investment Management Corporation (“BCI”), one of Canada’s largest institutional investors, today announce that they have reached an agreement to acquire Compre, a specialist global consolidator of closed books of non-life insurance policies, from CBPE Capital LLP. Financial details of the transaction are not disclosed.

Compre is focused on the acquisition and management of discontinued (also known as ‘run-off’) non-life insurance portfolios and has operations in the UK, Bermuda, Finland, Germany, Malta and Switzerland. The global non-life insurance run-off market is growing steadily, driven by insurers’ increasing focus on balance sheet optimisation, capital efficiency and disposals of non-core business lines. Compre has a proven track record of acquiring portfolios from major institutions including Allianz, Generali, HSBC and Swiss Re. Founded in 1991, Compre employs c. 80 people at its offices in the UK, Continental Europe, and Bermuda.

Cinven and BCI believe that Compre is an attractive investment opportunity based on:

• Compre’s high-quality, cash and capital-generative business model, that delivers highly predictable long-term profits, with significant downside protection;
• Its strong and established market position in the European non-life insurance legacy market and, more recently, its growing market position in the US market through its Bermuda platform, with further ambitions to enter the Lloyd’s market going forward;
• Its track record of acquiring and managing non-life legacy businesses over more than 30 years, comprising 11 company acquisitions and 39 portfolio transactions across various jurisdictions across Continental Europe, the UK and the US;
• Its proven financial track record of steady and consistent growth in recent years, delivering robust performance through the COVID-19 pandemic and prior downturns;
• The significant opportunity to capitalise on the increasing demand for legacy solutions and offer its products to a broader range of international clients; and
• An exceptional management and leadership team, led by CEO, Will Bridger, with significant expertise across its specialist areas.

The Compre transaction represents the second investment from Cinven’s new financial services sector-focused strategy, which will be focused on similar long-term investment opportunities across Europe.

Cinven Funds’ previous investments in the European insurance sector include Guardian Financial Services in the UK; Eurovita in Italy; and Viridium in Germany. Cinven recently announced an agreement to acquire Miller, a specialist insurance broker. Other financial services investments by the Cinven Funds include Partnership Assurance, NewDay, Avolon and Premium Credit.

BCI has made a number of investments in financial services companies, including Hayfin Capital Management, Verifone, and BMS Group.

Luigi Sbrozzi, Partner of Cinven, commented:

“Cinven is delighted to be investing in Compre alongside BCI. Over the last 30 years Compre has built a proven platform in the highly specialised insurance and reinsurance run-off market, and a reputation amongst its clients for consistently creating and realising value. Compre is extremely well placed to access new growth markets, such as the US and Lloyd’s, and to broaden its client offering further. We look forward to working with Compre’s management team to deliver these growth opportunities, drawing on the deep expertise of the Cinven team in the insurance sector.”

Jim Pittman, Executive Vice President & Global Head, Private Equity, BCI, said:

“We are impressed by the quality of the platform built by Will Bridger and his team and are excited to partner alongside Cinven to support the continued growth of the business. BCI’s investment in Compre follows as a result of our proactive, sector focused origination strategy and relationship building efforts with the company. We look forward to supporting Compre in its development and in turn providing attractive and stable long-term risk-adjusted returns for our pension plan and insurance fund clients.”

Will Bridger, CEO, Compre, added:

“We are also delighted to be partnering with Cinven and BCI as we embark upon our next phase of growth. This has been a historic year for Compre. We completed our first US transaction, launched our Bermudian reinsurer and now, subject to regulatory approval, have new shareholders supporting further growth of the business. This was made possible through the commitment of everyone at Compre and our drive and determination for what we do. The legacy market is on an exciting trajectory and, together with our new shareholders, we will be best placed to deliver the ambitious plan we have for Compre.”

The transaction is expected to complete in Q2 2021 and is subject to regulatory approvals.

Cinven and BCI advisors included: Macquarie Capital (M&A); Allen & Overy and Latham & Watkins (Legal); PwC (Commercial, Financial, Actuarial, Operations, IT); FTI Consulting (Actuarial, Operations, IT, Communications); Deloitte (Tax, Structuring) and Marsh (Insurance).

Management advisers were Liberty Corporate Finance (Financial Advisor) and DLA Piper (Legal and Tax).

About Cinven

Cinven is a leading international private equity firm focused on building world-class global and European companies. Its funds invest in six key sectors: Business Services, Consumer, Financial Services, Healthcare, Industrials and Technology, Media and Telecommunications (TMT). Cinven has offices in London, New York, Frankfurt, Paris, Milan, Madrid, Guernsey, Luxembourg and Hong Kong.

Cinven takes a responsible approach towards its portfolio companies, their employees, suppliers, local communities, the environment and society.

Cinven Capital Management (V) General Partner Limited, Cinven Capital Management (VI) General Partner Limited, Cinven Capital Management (VII) General Partner Limited and Cinven Capital Management (SFF) General Partner Limited are each authorised and regulated by the Guernsey Financial Services Commission, and Cinven Partners LLP, the advisor to the Cinven Funds, is authorised and regulated by the Financial Conduct Authority.

In this press release ‘Cinven’ means, depending on the context, any of or collectively, Cinven Holdings Guernsey Limited, Cinven Partnership LLP, Cinven (LuxCo1) S.A., and their respective Associates (as defined in the Companies Act 2006) and/or funds managed or advised by any of the foregoing.

For additional information on Cinven please visit www.cinven.com and www.linkedin.com/company/cinven/

About BCI

With C$171.3 billion of assets under management as of March 31, 2020, British Columbia Investment Management Corporation (BCI) is one of Canada’s largest institutional investors. Based in Victoria, British Columbia, BCI is a long-term investor that invests across a range of asset classes: fixed income; public equities; private equity; infrastructure; renewable resources; real estate; and commercial mortgages. BCI’s clients include public sector pension plans, insurance, and special purpose funds.

BCI’s private equity program, with C$17.9 billion of assets under management, is a well-diversified portfolio comprised of direct and fund investments. The team brings industry expertise with more than 30 investment professionals investing across financial and business services, healthcare, industrials, consumer, and TMT sectors.

For more information about BCI, please visit www.bci.ca.

About Compre

Compre is a leading legacy specialist with over 30 years of experience in the acquisition and management of discontinued and legacy non-life insurance and reinsurance business. We have experience of acquiring most classes of direct and reinsurance business, including general liability, marine and motor liability, and US APH. Compre has operations in Finland, Germany, Malta, Switzerland, Bermuda and the UK.

Our track record includes the acquisition of companies in run-off, transfers of legacy business portfolios, the provision of reinsurance solutions and the subsequent management and closure of run-off liabilities. Solutions are tailored to meet the specific requirements of the vendor in relation to their legacy portfolios and cover economic, legal and administrative finality.

Compre is independent and privately owned. It is managed by its Executive Directors: Will Bridger, CEO; Mark Lawson, Group Actuarial Director; Dr Hubertus Labes, Managing Director – Germany and Austria; Simon Hawkins, COO, Eleni Iacovides, Chief Development Officer and Ian Patrick, Group CFO (subject to regulatory approval).

www.compre-group.com

This is a great deal for all three parties, BCI, Cinven and Compre.

By investing alongside Cinven, one of the best European private equity firms, BCI got access to this deal.

The deal doesn't surprise industry experts. Back in September, Charlie Wood of Reinsurance News reported that Compre was eyeing capital raise off COVID-19 and the market hardening:

Leading specialist legacy acquirer Compre is looking to raise additional capital in the face of increased legacy activity related to the COVID-19 pandemic and hardening insurance market.

Compre says its current shareholders, private-equity firm CBPE Capital, remain committed to the business and support its management team’s outlook.

The existing team, led by CEO Will Bridger, will remain unchanged and is committed to the growth of the business.

“Now is the time to invest in the legacy market and it gives me great pleasure to be taking this step in our company’s history at such a promising time for legacy acquirers,” said Bridger.

“Legacy has matured through the years and has become a vital part of the industry’s infrastructure.

“The demand for our solutions has surpassed expectations and Compre is committed to providing bespoke structuring to enable clients to reach their business objectives during this challenging period and beyond.”

Keep in mind, CBPE Capital acquired Compre back in October 2015 for an undisclosed amount. Over the last five years, it provided significant capital to Compre for the acquisition of European insurance carriers and the transfer of legacy portfolios.

So why did CBPE Capital sell its stake to Cinven and BCI? Private equity firms typically sell their stake after three, four or five years to realize gains and raise their next fund.

Also, there's no doubt the offer was right and there are better alignment of interests between BCI, Cinven and Compre which is looking to capitalize on increased demand for its solutions, providing bespoke structuring to clients.

In fact, Will Bridger, CEO, Compre, stated fat out:“We are also delighted to be partnering with Cinven and BCI as we embark upon our next phase of growth. The legacy market is on an exciting trajectory and, together with our new shareholders, we will be best placed to deliver the ambitious plan we have for Compre.”

And Jim Pittman, Executive Vice President & Global Head, Private Equity at BCI, explains why they backed this deal:

“We are impressed by the quality of the platform built by Will Bridger and his team and are excited to partner alongside Cinven to support the continued growth of the business. BCI’s investment in Compre follows as a result of our proactive, sector focused origination strategy and relationship building efforts with the company. We look forward to supporting Compre in its development and in turn providing attractive and stable long-term risk-adjusted returns for our pension plan and insurance fund clients.”

Go that? The name of the game is attractive and stable long-term risk-adjusted returns and the insurance industry is ripe for major dislocation/ consolidation and transformation.

Recall, I recently discussed why CDPQ, CPP Investments and Ontario Teachers’ are helping Intact Financial Corp. to finance its conditional acquisition offer for RSA Insurance Group.

I also recently discussed why PSP Investments is dipping into insurance-linked-securities. 

Why do Canada's mighty pensions love insurance deals? Because they offer stable and attractive cash flows over th elong run and in a world of record low rates, they did to diversify away from bonds to find suitable investments that offer competitive risk-adjusted returns over the long run.

And insurance deals offer attractive and stable yields over the long run but at higher risk than bonds. Still, if yields back up and eventually normalize, insurers will reap huge gains in the future.

Interestingly, a week ago, CDPQ announced it was part of a consortium that helped lauched Inigo, a new insurance group:

Inigo Limited (Inigo), a new insurance group, announces that it has successfully completed a capital raise of approximately $800 million from a consortium of global investors comprising (amongst others) funds controlled by Caisse de dépôt et placement du Québec (CDPQ), Enstar, J.C. Flowers & Co., Oak Hill Advisors, Qatar Investment Authority, Stone Point and Inigo’s management team. The funds give Inigo the capital base required to proceed with its plans to open for business in the 2021 year of account, subject to approvals from the Corporation of Lloyd’s.

Inigo is being founded by Richard Watson, former Chief Underwriting Officer of Hiscox who stepped down from the group last year after 33 years, along with Russell Merrett, former Managing Director of Hiscox London Market, and Stuart Bridges, former Chief Financial Officer of both Hiscox and ICAP. 

Sir Howard Davies, Chairman of NatWest Group, has been appointed as Chairman. Sir Howard has a distinguished career in the City, business and government; he was Chairman of the Financial Services Authority from 1997 until 2003, Director of the London School of Economics from 2003 until 2011, and Chairman of Phoenix Group from 2012 until 2015.

As part of its preparations, Inigo also announces that it has signed an agreement to acquire certain insurance underwriting assets of StarStone Underwriting Ltd including its Lloyd’s Syndicate 1301 and its managing agency, from Enstar Group, subject to regulatory approvals. These are intended to form the foundation for Inigo’s operations as a specialty insurer, writing a streamlined portfolio of insurance and reinsurance risks. No legacy underwriting will be transferred to Inigo.

Inigo believes that current conditions are ideal to launch a new insurance business, at a time when demand across a number of classes of insurance and reinsurance is high. Inigo has chosen London as its principal base since it regards the overall insurance ecosystem offered by Lloyd’s as exceptionally attractive and believes it will best support the growth and development of the new syndicate.

Richard Watson said:“This significant capital raising, together with our acquisition, gives us the platform we need to turn Inigo from a concept into reality. We believe that 2021 will mark the beginning of an exciting growth phase for Lloyd’s and the London Insurance Market and Inigo will contribute to growing the specialty and reinsurance marketplace, as it returns to profitability. Sir Howard Davies joining our board validates our vision for Inigo and our determination to provide credible additional capacity and services to customers and brokers.

We are fully supportive of the direction that John Neal, Lloyd’s CEO, is taking the market, making it a more attractive and efficient place in which to trade. For a company like ours, entirely focused on underwriting, London also has the depth of young talent we need to develop the analytical and data-led approach that is at the core of what we hope to do.”

Inigo was advised on the transaction by Evercore, Guy Carpenter Securities and Clifford Chance.

Got it? Inigo believes that current conditions are ideal to launch a new insurance business, at a time when demand across a number of classes of insurance and reinsurance is high. 

Are Canada's mighty pensions investing in insurance deals because they think rates are too low and are bound to normalize over the next decade?

No doubt, that factors into their decision but as I stated above, the insurance industry is on the cusp of major transformation and you need to partner up with the right partners to gain access to the right deals.

It's been a few years now that VCs have been betting in the coming years, we’ll see major shifts in both how we buy insurance and what types of items we insure with it.

In Q1 2019, the insurance broker sub-sector in North America recorded the highest merger & acquisition (M&A) deal volume in the wider insurance industry, led by private equity:

“PE tends to be a short- to medium-term investor,” said John Marra, US insurance deals leader, PwC. “They could buy a brokerage for $5 million, and that purchase might represent a 5X free cashflow or EBIT (earnings before interest and taxes). They could finance 30-60% of that, then grow the business and sell it for $10 million three years down the road, at a higher multiple than they paid the previous owner of brokerage.”

PE investors typically approach the brokerage space with the idea of introducing efficiencies and rolling up different properties. They’re also looking for financial arbitrage between borrowing big financial leverage on the transaction and then getting the brokerage owner to accept less than the 8-10X multiple that the overall property would be worth, Marra explained. The owner might accept a 5X free cashflow, with the incentive that if they help grow the brokerage value from $5 million to $10 million, they can eventually walk away with more money.

“The thing that has become very attractive about the brokerage space to PE is that it’s a free cashflow business, it’s not capital intensive, and it’s must less regulated than the carrier sub-sector. They can also get quite a lot of financial leverage as the lenders are willing to finance the deals for all the same reasons,” Marra told Insurance Business.“PE will often invest in a brokerage and then they’ll find a very experienced leader to come in and help run the business. They will work with management teams to introduce new incentives and help them execute new business plans and growth strategies.

“I don’t think PE necessarily sees brokerage as a big growth engine because the insurable base in North America is not necessarily growing. It is somewhat growing with new products, but not necessarily increased premium. They’re currently playing more in the brokerage space because of the potential for arbitrage and because they can consolidate. They can pick up many different brokerages, flip them around and increase their value, and then sell them on. That’s what their strategy has been, and they’ve done very well.”

I think PE and big Canadian pensions are looking at all segments of insurance, including brokerage.

Anyway, I like these deals and think they will prove very profitable over the long run, providing these pensions with stable cash flow.

Before I end this comment, a few related items.

First, last week, I went over whether BCI's governance is a ticking time bomb and it was brought to my attention that two years ago, Claude Marchessault praised the governance at B.C.'s public pensions in Benefits Canada, stating this: 

While retirement income security is top of mind for many Canadians, British Columbia’s public sector pension plans are noteworthy models that can be emulated by sponsors seeking plan design solutions, particularly when it comes to governance.

Some other Canadian jurisdictions have introduced, or are in the process of developing, pension governance models similar to British Columbia, but none is as comprehensive and applicable to all public sector pension plans. For example, while the Alberta Pension Services Corp. and the Alberta Investment Management Corp. manage and invest for the province’s public sector plans, those plans aren’t jointly sponsored and the Alberta government still plays a major role in their management.

So why the change of heart? Also, while Mr. Marchessault questions the Gordon Fyfe's dual role of CEO/ CIO at BCI, I was also told Mr. Fyfe runs every major investment decision through his senior managers (but he has the final say). 

What else? CDPQ's Réseau express métropolitain (REM) has hit a few snags lately but you'll have to wait till tomorrow to find out all about that, this comment is done!

Below, Paul Schiavone, Global Industry Solution Director of Financial Institutions, invites you to join AGCS along with panelists from KKR and AON for a 1 hour informal discussion among customers, brokers, and insurers focusing on leveraging insurance to drive value. You can register here to watch this webinar. Take the time to watch it.

The teams of the Caisse de dépôt et placement du Québec have not stood idle since the start of the pandemic as they have been busy thoroughly reviewing the institution's entire investment portfolio and contacting all companies with whom they partnered up with to understand their immediate needs and challenges. “Quebec Inc. as we have known it is changing, and we want to support the new disrupting companies that emerge, ”explains CEO Charles Émond, who took over the Caisse last January, just before the outbreak of the crisis that nobody expected.

When you were appointed last January, I wrote a column in which I explained that you had the attributes necessary to become the helmsman of this enormous liner that is the Caisse de dépôt. I ended my text by wishing you not to have to weather a violent storm. Was that a very bad prediction?

Yes ... Exactly, I was rereading this column yesterday, and even though we were at the end of a cycle, nothing foreshadowed the onset of a crisis like the one we are experiencing. A recession, we can see it coming slowly, but this is a particular crisis that has a major economic impact and which also greatly affects the lives of all people.

Overnight, assets we own - roads, airports, shopping centers - were deserted. Stock markets fell 35% in 23 days but recovered almost everything in less than six months. We did an in-depth review of the Caisse's entire portfolio and we consulted all of our companies to see what we could do for them.

You published your first half results last summer, which showed a loss of $8 billion and declines of 5% of your stock market portfolio, 1% of your infrastructure portfolio and 11% of your real estate investments. Is the situation still as critical today?

Our Real Assets portfolio, particularly infrastructure and private equity, shows great resilience, apart from the transportation portion, which represents 15% of our infrastructure.

In real estate, our retail assets suffered, and we began to reform our shopping centers by selling some of the 25 we operate in Canada and repositioning others. One thing is certain, we must give it time, we cannot transform a $60 billion portfolio in three days.

In Private Equity, you still suffered steep losses with your investment in Cirque du Soleil?

Yes, it's true. It's a loss, and the entire entertainment business is now extinct, but we have recovered with our holdings in health, technology and sustainable manufacturing.

The equity performance you got in the first half of the year was affected by your underweight exposure to big tech companies. Does this still affect you?

For the stock markets, we keep the same approach we had but we do it with different glasses. It is not just the FAAMGs that need to be considered, but how the digitization of the economy is transforming markets.

From an offensive perspective, you have to assess the type of companies in which to invest, and from a defensive perspective, you have to see how emerging technologies can affect our portfolio. These technologies can also serve us better internally by making greater use of advanced intelligence in investing.

It should also be noted that our fixed income portfolio is responding very well. There was a migration to infrastructure and corporate debt two years ago, and it is much more promising than buying a single bond.

You are a speaker this Tuesday at noon at the Chamber of Commerce of Metropolitan Montreal. What message do you want to send to the business community?

There are three, four messages that I want to share, including our vision on the extraordinary economic environment we live in today and on the growing role of technology.

We commissioned a study from KPMG to find out which are the structuring companies today, which are innovative, which allow their clients to evolve and be more productive, which ones invest.

Quebec inc. history is being transformed. CGI, Couche-Tard and Cascades still occupy important places, but there are many SMEs that are in growth sectors, new technology companies that do not have tangible assets.

We want to accelerate the development of our champions such as Nuvei, Medicom, Eddyfi, companies which are making technological leaps for their customers like Lightspeed or Dialog, which has made breakthroughs in telemedicine.

Same thing with our investment in the Réseau express métropolitain (REM), we are doing it because it will improve the quality of life for people who travel downtown.

In this regard, you have just signed with seven other major Canadian pension fund managers a declaration in favor of greater and better disclosure of environmental, social and governance (ESG) issues for companies. Why did you participate in this process?

By uniting our voices, we want to give more strength to a multitude of initiatives that we have taken individually. We want better measures of ESG issues, standardization in the disclosure of these elements, with a view to better transparency. This is done with environmental and governance standards, but the social issues are growing. It should be taken into account better.

You have been the subject of virulent criticism from the CEO of Garda, who accuses you of having invested in the security firm Allied, which wants to make an offer on the firm G4S, which is criticized for its disastrous record in ESG subject. How do you respond to these accusations?

First, as we speak, there is no offer from Allied on G4S, there are intentions, but there is only one offer and that is Garda's. The Caisse does not skimp on ESG impacts, we have a large team that goes through each of the companies in which we invest.

We do not have malleable ESG criteria. Are there any fixes that need to be made to any issues, it is possible. There may be activities that she would be required to abandon. We do not compromise on this, it is the Caisse's worldwide reputation that is at stake.

A word in closing on three of your major holdings in Alstom, SNC-Lavalin and the McInnis cement plant. Where are you in these files?

We are very satisfied with the transaction with Alstom, which will make us the primary shareholder with 18 to 19% of the shares of this large rail transport group, the second largest in the world behind the Chinese. The transaction cost value is $4 billion, which will make it the largest investment in the Caisse's overall portfolio.

We are a patient investor in SNC-Lavalin and we agree with the strategy of repositioning the company, which abandons the engineering-construction sector and natural resources. SNC-Lavalin is a strategic player for Quebec and the development of our infrastructures.

Finally, for our investment in Ciment McInnis, as we have said before and it's worth repeating, it is not the role of the Caisse to be a cement plant operator. We are waiting to find a strategic operator and we are not talking in terms of write-off of assets for this investment.

Alright, good interview with Charles Emond ( Émond in French). I used Google to translate the bulk of the article and my high school courses at Collège Notre-Dame to edit it a bit, but for the life of me, I still can't figure out what "sustainable manufacturing" is in private equity (might be referring to renewable energy?).

Anyway, Charles Emond is cursed and blessed. Cursed because just like OTPP's Jo Taylor, HOOPP's Jeff Wendling and OMERS' Blake Hutcheson, he started his CEO mandate right at the outset of a global pandemic. 

Blessed because as he points out, global stock markets have recovered and there he can thank Fed Chair Jerome Powell and other central bankers who unleashed a liquidity tsunami and are backstopping madness. 

It might not end well but for now, global stocks look good going into year-end (it can change on a dime).

But in private markets, Mr. Emond was very forthright, stating retail real estate assets are struggling, as are transportation infrastructure assets.

When you look at the policy responses to the pandemic, they have first and foremost helped liquid markets (stocks and corporate bonds in particular) and left a mess in some sectors of private markets.

Every major Canadian pension fund has some scars from the pandemic: AIMCo's vol blowup, CPP Investments is taking its lumps on Highway 407, OTPP's airports portfolio is getting hit, OMERS's real estate portfolio is exposed and so is on and so on, everyone is getting hit.

Now, I'm not too worried about airports over the long run but I'm worried that there's a secular shift going on in real estate and many institutional investors who are only listening to Bruce Flatt, not Bill Gates, are underestimating the long-term impacts on commercial real estate.

I get it, vaccines are coming, but if you think the world is going back to where we used to be last year, you're sorely mistaken. Working from home and working from offices will co-exist and for some tech companies, there will only be working from home (and they set dominant trend in commercial real estate, not accounting and law firms and not pension funds!).

What about retail malls? No doubt, they got hit the most but they're not dead, all you have to do is drive around to see activity at malls.

Also, I enjoyed reading this Montreal Gazette article over the weekend on why industry experts insist fears of a “mallpocalypse” are overblown, as long as shopping centres adapt to the new normal:

“I still believe in malls,” Peter Simons, chief executive of the Quebec City-based clothing retailer that bears his family’s name, said in an interview. “Malls, in terms of discovering new things, have a lot of potential. It’s getting very expensive to break though all the noise on the web. Perhaps malls have to surprise you to make it worth going to.”

Vincent Chiara, CEO of developer Mach Group Inc. and owner of properties such as Laval’s Centre Duvernay, shares Simons’ faith in the shopping centre model — so much so that he’s on the lookout for additional assets.

“Brick and mortar shopping isn’t about to disappear, and neither are malls,” he said in an interview. “Malls are moving from being fashion centres to becoming service centres. We see more services to the people. We see pharmacies, clinics, and now supermarkets in malls. The model has changed a lot, and it will continue to change.”

Read the entire article here,  it's raises excellent points on malls. 

My own feeling? People don't go to malls just to shop, they go to escape from the routine of life, which is why malls are still busy despite the pandemic (they're fed up of COVID but we are just entering a dark winter and need to be extra vigilant over the next three months).

Anyway, all this to tell you Charles Emond is dealing with a lot of things as are his peers at Canada's large pensions but he also inherited some problems from Michael Sabia.

Don't get me wrong, Sabia did great things at the Caisse and I told him that when I met up with him at a Christmas party we were both invited to last year. I also told him "you were the luckiest Caisse CEO by far" and he agreed with me as he brushed his forehead.

But he failed to really dig dip into the Caisse's massive real estate portfolio and he had way too much confidence and praise for Daniel Fournier, the former CEO of Ivanhoé Cambridge. 

Looking back now, Fournier might have inherited a retail legacy portfolio from his predecessors but he certainly didn't do enough to trim this massive exposure.

That job is now the responsibility of Nathalie Palladitcheff, the current CEO of Ivanhoé Cambridge who has taken massive writedowns on retail assets.

Again, I want to be crystal clear, Michael Sabia did many good things at the Caisse (bolstered risk, governance, ESG investing and diversity and inclusion) and Ivanhoé Cambridge posted solid returns while Daniel Fournier was at the helm but it was a bit of a smoke show.

In my opinion, Sabia put way too much trust in Fournier and should have done an independent and detailed analysis of the Caisse's real estate portfolio from the onset to really understand the risks of that portfolio (not that they could have predicted a global pandemic).

And now it's up to Charles Emond and Nathalie Palladitcheff to clean up that huge mess and as Emond states above, it will take time to restructure and reposition a $60 billion real estate portfolio, you can't do it overnight.

Another legacy investment Emond inherited is the $6.3 billion Réseau express métropolitain (REM), what many call Michael Sabia's "baby" or "brainchild".

To be sure, doing a massive greenfield infrastructure project of this scale was unique and placed the Caisse ahead of all its competitors, but it had its risks, and the pandemic wasn't the only one.

Thank God it's still being built and not operational because it would have been empty light rail cars going to downtown Montreal during this pandemic.

Lately, the REM has hit a few snags. Jason Magder of the Montreal Gazette recently reported that an unexpected explosion could delay REM project up to 18 months:

The builders of the Réseau express métropolitain revealed on Wednesday that leftover explosive material from the century-old Mount Royal tunnel’s original construction detonated in July.

No workers were injured by the explosion, which along with the pandemic, has meant that construction of the Mount Royal tunnel portion of the project will be delayed by up to 18 months.

“People in general are disappointed, but no one is really very surprised (about the delay),” said Francis Millaire, a spokesperson for commuters using the Deux-Montagnes train line, which has pushed the government to improve its plan for alternative transit service during the tunnel closure. “This is why we were so concerned about mitigation measures, because everyone knew this would impact our lives for a long period of time.”

Service on the Deux-Montagnes Line from Bois-Franc to Central Station was stopped in May when the tunnel was closed to be refurbished, as two stations will be built underground — connecting to the McGill and Édouard-Montpetit métro stations.

The explosion happened in the tunnel near Town of Mount Royal on July 21 when heat from drills came into contact and ignited explosive material left over from the tunnel’s original construction in between 1912 and 1918.

Work was interrupted until recent days so that new safety measures could be put in place for workers, Jean-Marc Arbaud, the managing director of CDPQ Infra, told reporters in a briefing. REM builders worked with officials from the province’s workplace safety board, the CNESST, to put in place the additional safety measures, because there remains a risk of further explosions, CDPQ Infra officials said.

When asked why CDPQ Infra — a division of the Caisse de dépôt et placement du Québec — didn’t reveal information about the explosion sooner, CEO Macky Tall said because it was a minor incident that didn’t have much of an impact.

“Immediately after the event happened, we notified the competent authority, which was the CNESST. We worked with them and independent experts to develop a safe and secure work plan,” Tall said. “This unexpected incident, when it happened, caused no injury and had no impact.”

Millaire said CDPQ-Infra should have notified the public as soon as the explosion occurred.

“There is still obviously a lack of transparency,” he said. “Why did it take so long between July and now to announce this? To me, this isn’t news that should have waited.”

He said the lack of transparency doesn’t help win public support for the project.

“We have always felt that some things have not been communicated how they should have been, and after hearing this news, how confident can we be that this current delay will be the last one?”

When you're building a multi-billion dollar light rail project going through a tunnel that was made 100 years ago, you're bound to run into a few "bombs".

Thank God this happened now and not when the REM will be operational. I heard this tunnel was always a huge fire hazard and Montrealers would have been appalled at its state if they knew the truth.

Now what? Well, they will need to use robots to find uncharged explosives (happens often in major construction projects) and it will delay the project, by how much is anyone's guess.

If you ask me, delays are good right now, as long as they're not too costly.

But the tunnel explosion isn't the only snag the REM is running into.

Two weeks ago, Annabelle Olivier of Global News reported that uncertainty surrounds construction of future REM train station at Montreal’s Trudeau airport:

Uncertainty continues to surround a proposed Réseau express métropolitain (REM) train station at Montreal’s Trudeau airport. The light rail network, once finished, should include 67 km of tracks that link Montreal, the south shore, the West Island and the north shore.

The ongoing pandemic, however, is causing some setbacks.

In August, Aéroports de Montréal (ADM) announced it was suspending all construction projects that didn’t protect the integrity of its assets, citing, at the time, “almost non-existent revenues.” ADM had previously announced that it would fund the construction of the train station in order to ensure airport access along the light rail network.

But in August, ADM said it would have to continue in “planning mode” until  it could secure a “tailored loan” from various levels of government.

On Thursday, however, the Quebec government indicated that while it supports the building of the train station at the airport, it has already made a substantial contribution to the REM project as a whole.

A spokesperson for Transport Minister François Bonnardel said the government has already invested $1.28 billion in the REM, not including $192 million for the implementation of mitigation measures, while Hydro-Québec has also contributed $295 million.

“At this stage, we believe that efforts can still be made by the Montreal airport, which falls under the purview of the federal government and not of the Quebec government, in the search for a solution for the financing of this project,” said spokesperson Florence Plourde in an email to Global News.

ADM spokesperson Anne-Sophie Hamel said it wouldn’t be commenting as “the information has not yet been confirmed officially to ADM” by the Quebec government, “with whom we have been negotiating for more than five months.”

Hamel said the airport authority has been in negotiations with both levels of government in a bid to secure a loan, which is crucial to the financing of the project, seeing as ADM is anticipating revenue losses of around $600 million for 2020 alone.

“If it does not get a loan, ADM does not see how it could finance the construction of the REM station at the airport, without deviating from its primary mission as an airport authority,” she said.

Despite the setback, Hamel said ADM remained confident it would find the financial backing it needs in order to meet its obligations towards the REM project.

At a news conference on the province’s response to COVID-19 measures, Premier François Legault argued that having a train station at the airport was critical but reiterated it wasn’t the provincial government’s responsibility to pay for it.

“It has to be payed by the owner. The actual owner, ADM, or the preceding owner which was the federal government, he said.

“It doesn’t make sense that a big city like Montreal doesn’t have a station at their main airport. We can bring the REM to the airport but the station has to be paid either by ADM or by the federal government.”

In an email to Global News, Federal Transport Minister Marc Garneau expressed his consternation.

“We were disappointed to learn that the government of Quebec has withdrawn from the Montreal airport station project after several months of work in collaboration with our government,” wrote Amy Butcher, a spokesperson for the minister.

“It is imperative that a solution be found given the importance of the airport station for this entire public transit project, a project that will improve mobility for citizens and visitors to the Greater Montreal area for generations to come.”

The mayor’s office also expressed disappointment.

“The withdrawal of a financial partner at this stage of the project could jeopardize its implementation and the success of the project,” said Youssef Amane on behalf of Montreal Mayor Valérie Plante.

The news also comes as a surprise to Montreal’s Metropolitan Chamber of Commerce. The group has long supported the creation of a link between downtown Montreal and the airport.

“We were all caught by surprise and that should not happen for a project of this magnitude and this strategic importance,” said Michel Leblanc, CEO for the Chamber of Commerce.

Leblanc’s take on the situation is that it could be a negotiating strategy on the part of the provincial government. Ultimately though he believes that since the airport is part of federal infrastructure, the federal government should be offering the loans to airport authorities to help pay for the construction of the future train station.

Alright, let me give you the quick scoop on this.

Aéroports de Montréal (ADM) which manages the Montreal Trudeau International Airport, is a federally regulated entity. 

Some industry experts told me "it's terribly managed" but still a "cash cow for the federal government because of user fees". Others have told me "its governance is shoddy leaving it exposed to corruption" and "there's no accountability whatsoever". 

This is important background that needs to be noted.

Anyway, CDPQ Infra was in charge of building the REM and extending the line till the airport but it was up to the ADM to build the REM airport station and let me be crystal clear, it is and remains the responsibility of the federal government to provide the financing for this station. 

I have no idea why Federal Transport Minister Marc Garneau expressed his consternation over the fact that anything built on the Montreal airport's site falls under the purview of the federal government.

Indeed, yesterday, the federal government balked, announcing it will provide the funding for the REM airport station (see clip below).

In my opinion, the federal government should also sell a majority stake in all the major airports in this country to Canada's large pensions and global investors and get out of managing our airports (remain a minority shareholder).

I have zero trust in the entities managing our airports now, ZERO!!

It's high time the federal government get out of managing airports, forgo the user fees but collect a lump sum payment and use it to pay down the massive $400 billion federal deficit it has accumulated because of the pandemic.

This will be a win-win for all Canadians and give the Bank of Canada a break from monetizing all that federal debt.

But what do I know, I'm just a well read pension blogger, not a federal politician.

By the way, before I admonish the Trudeau Liberals, what was the former leader of the Conservative party, Andrew Scheer, thinking when he recently fired missiles at the Canada Infrastructure Bank on Twitter:

After almost four years and with an allocation of $35 billion, the Canada Infrastructure Bank has completed ZERO projects. When I asked the Infrastructure Minister about it, she refused to answer the question. #canpoli#infrastructurehttps://t.co/aXkQxAz60j

— Andrew Scheer (@AndrewScheer) November 25, 2020

Mr. Scheer needs to get his facts straight, the Canada Infrstructure Bank funded the REM project, it was its first major investment (no thanks to the folks at CDPQ Infra).

Having said this, I don't know much about Ehren Cory, CIB's new CEO, but one criticism I keep hearing about the Canada Infrastructure Bank is they continue to hire people with no revenue risk transactions under their belt, only people who know theory but lack a lot of practical experience. 

Hopefully Mr. Cory will change that and hire more senior people with practical experience in revenue risk transactions,

Michael Sabia, where are you? As the Chair of the Canada Infrastructure Bank, please give me a call so I can give you an earful (what, you think only Sabia is allowed to huff and puff?!?).

Alright folks, I'd better stop there as I tend to ramble on, makes the pension elite a bit uncomfortable.

Below, where one government has left off, the other has picked up. The federal government announced on Monday that it plans to provide most (but not all) of the funding to build the REM light-rail train station at Trudeau airport. Global’s Tim Sargeant reports.

I'm glad the feds came to their senses but I'm surprised they refuse to cover the full $600 million, only $500 million. What's $600 million when you can add it to the $400 billion deficit? (Maybe someone tipped off the feds that the ADM can't be trusted and the $600 million figure is highly inflated).

In all seriousness, all major airports in this country are federally regulated and fall under the federal government's purview, for better of for worse. I'd rather see them owned by our large Canadian pensions but admittedly, with airport traffic down 90% and revenues collapsing, now is not the time to sell.

I will try to embed Charles Emond's address to The Chamber of Commerce of Metropolitan Montreal if it becomes public but you can watch a replay by registering here (must admit, I haven't seen it yet).

Wouter Klijn of i3 Insights reports on how Sandra Bosela and her team run private equity at OPTrust:

COVID-19 has had a different impact on the various segments in the private equity sector. We speak with OPTrust’s Sandra Bosela about the fund’s experience pre and during the pandemic.

Private equity investors seek to generate above market returns by taking an active role in the management of a company: cutting costs, expanding into new markets and attracting new talent.

But in the context of a broader multi-asset portfolio, private equity also functions to smooth out returns. Since they are unlisted, these assets are not subject to the whims of the news cycle or the sometimes erratic behaviour of the retail market.

In this context, investors often look for businesses that are not beholden to the economic cycle, but produce stable profits in any environment.

Dental businesses are a good example of this. Recession or not, most people still value clean teeth, devoid of any holes. But the coronavirus pandemic challenged even these otherwise robust businesses.

“We have invested in a couple dental businesses; we really like that industry. Dental has been very stable over many recessions, partly because a lot of people are not paying for dental services themselves, they have healthcare plans and they just want to practice good hygiene,” Sandra Bosela, Managing Director and Global Head of Private Equity at Canadian pension fund OPTrust, says in an interview with [i3] Insights.

“But in the early days of the COVID pandemic dental was probably near the top of the list of perceived high risk businesses given the aerosols that come out of someone’s mouth during dental and hygiene services. This resulted in most dental services, other than emergency services, being prohibited during initial lockdowns in the spring which had an impact on businesses across the industry.

OPTrust’s dental businesses have since reopened and recovered as initial lockdowns were eased in many parts of the world and people have once again returned to the dentist, with additional precautions being taken and even more PPE used to protect dentists and hygienists. But it proved to be a reminder that risk can hide in unexpected places.

“We do a lot of scenario analysis prior to making investments to truly understand downside risk. Recession cases are certainly part of that analysis. Now I think pandemic scenario analysis will be something that investment teams will look at as they go forward. We certainly will,” Bosela says.

“We are always trying to analyse what could go wrong with a business, what could disrupt its performance and will any negative impact be short term, or long term? In a pandemic scenario there could be things that happen that are just very different than what you would see in an economic recession,” Bosela says. “So, it is important to understand these risks”.

Planning for a Recession

Bosela and her team have an impressive track record, clocking up returns in the 20 per cent range over the last number of years, including last year when the private equity portfolio produced a return of 24.7 per cent.

“The outsized performance in 2019 came from multiple deals, across different geographies and sectors,” Bosela says. “It wasn’t just one deal that made that return; it was also a combination of actual realisations, as well as increases in our mark-to-market valuations as a result of organic growth and strategic growth initiatives.”

And although this year certainly proved to be a challenge, OPTrust managed to avoid some of the hardest hit sectors during the pandemic.

“We don’t have a lot of exposure to retail or restaurants, travel or tourism, large scale event businesses, commodities or other industries that were hardest hit,” Bosela says.

“We’ve tended to focus our investments in the portfolio over the last number of years more on essential service type businesses and industries. We didn’t do that with a pandemic in mind, but because we were thinking that we were late in the cycle and if a recession was imminent then we wanted to invest in recession resilient businesses that would have stable demand characteristics that could help to minimize volatility in our portfolio. These types of businesses often have more limited downside risk but offer strong upside potential. We like investments where we see that asymmetric return profile.”

Valuations

With the potential of a recession in the back of mind, the team has taken a very disciplined approach to valuations for new investments, especially as valuations have continued to rise across the board.

“When I think back to when I first started in this industry, we were buying businesses at four to six times EBITDA and today you are often paying 10 to 15 plus times EBITDA, so we are really in a different environment,” Bosela says.

“When you pay those types of valuations for businesses, you can’t assume multiple expansion on exit; in fact, we are often factoring multiple contraction into our investment cases given where we think we could be in the cycle and what more long term sustainable valuation levels could be. The ability to successfully execute on value creation opportunities becomes critically important and plays a much larger role today in generating returns.”

But even with the portfolio positioned defensively, 2020 has been a more challenging year for OPTrust’s private equity portfolio. It might have avoided the hardest hit sectors, but the pension fund still saw the performance of many of its portfolio companies impacted by the lockdowns globally in the Canadian spring.

“A number of our investments were certainly impacted; some businesses were virtually completely shut down for a few months earlier this year and other businesses had negligible to no impact, and then a range were in between where there was some level of demand softness for a period of time.

“Growth was temporarily put on hold for many of our businesses through the second quarter as we worked with our companies to preserve liquidity until their business operations returned to more normalised levels. We were very fortunate in our direct portfolio that we didn’t have any rescue capital calls to support operations through those challenging months and we are quite proud of that,” Bosela says.

“We think that was really driven by the flexible and conservative capital structures that we put in place in our companies, as well as the ability for our management teams to conserve cash through the cost-saving programs that were implemented across the portfolio.

“Throughout the summer and into the fall most of our businesses have seen a gradual recovery to near pre-pandemic levels and in some cases we are actually seeing growth above pre-pandemic levels.

“Despite the challenges of 2020, we feel very good about the resilience of our private equity portfolio and the ability for it to continue to deliver attractive risk-adjusted returns in line with our expectations over the longer term.”

Transport

The transport sector has been one of the hardest hit sectors during the pandemic. As lockdowns became commonplace, airports saw traffic volumes collapse by up to 90 per cent. Toll roads were less impacted as many people avoided public transport and opted for their private vehicle, but even here the greater use of cars hasn’t made up for the overall drop in traffic.

OPTrust owns investments in this sector, including Kinetic Group, which started out with a single bus route from Melbourne Airport to the city’s CBD under the SkyBus brand.

“When we acquired our bus business, it operated a single bus route from the Melbourne airport into the downtown. That would feel like a high-risk business in today’s environment, but if you fast forward from our initial investment to today that business is now Australia and New Zealand’s largest diversified bus, mass transit operator,” Bosela says. “Today, that aviation segment represents only 10 per cent of the business.”

Not only is Kinetic a well-diversified business today, its revenues are also largely tied to government contracts, which has made it more resilient during the lockdown.

“The vast majority of the business comes from government contracted bus services, so it is not linked to passenger or fare risk. Even if people in Australia, New Zealand weren’t riding the bus we would still have a stable demand, because it is contracted.”

Allocation to Private Equity

As with many pension funds that have adopted the Canadian Model, private equity is an important part of OPTrust’s portfolio. The internal team of 19, which manages both the private equity and infrastructure programs for OPTrust, runs about 50 per cent of the assets directly or via co-investments, which helps reduce costs, influence the composition of the portfolio by overweighting certain sectors and allows the team to have a more active management style.

“Active management and governance provide a lot of benefits including access to real-time information, something that was especially valuable during the early months of the pandemic this year. Having more control over our investments and a voice at the table in shaping strategic plans and other value creation initiatives allow us to better influence the outcomes of our investments, which is important to us”, Bosela says.

“We are targeting a long term allocation to private equity of approximately 15 per cent of OPTrust’s total Plan assets; we are slightly below that at about 13 per cent right now. We hope to get to 15 per cent over the next year or so, but as with any private equity portfolio you have a natural level of churn, where every five to seven years you are selling investments, so our actual allocation ebbs and flows.

“In 2016, we added a long-term equities strategy to our portfolio. The assets under this strategy are lower risk private equity assets, with more stable growth and cash flow profiles that have the potential to be longer term holds, up to 10 years or longer. We like having a component of the portfolio in these longer-term investments, to complement our traditional buyout strategy from a risk perspective and average hold period”.

When asked what industries OPTrust favours for its private equity portfolio Bosela says, “We like healthcare and healthcare services businesses because they are generally needs-based services and have resilient business models with stable demand characteristics.

As an example, we own a veterinary services business. It doesn’t matter what economic environment you are in, if your pet gets sick, you are still going to the vet.

“We focus on sectors where there is a large market opportunity with a stable reimbursement environment or revenue model, in sectors with room to execute consolidation strategies and by providing clinical services that can address growing consumer demand with better quality solutions.

“There are also businesses we like that combine healthcare and information technology, doing thing such as improving the quality, integrity, security, compliance and timing of information and data flow, providing secure payment solutions, creating end-to-end solutions or taking cost out of the healthcare system. We believe businesses that offer better solutions through the use of technology offer great opportunities to earn very attractive risk adjusted returns.

“We like a lot of other essential services businesses and industries outside of healthcare, such as transportation, education, telecom and power sector service providers, insurance, banking and other financial solutions, among others.

“Businesses in all of these industries tend to be relatively stable and perform well throughout cycles, without a whole lot of volatility. They also have the ability to generate very attractive risk-adjusted returns through various growth and other value creation initiatives. Again, we like that asymmetric payoff curve.

“And then we try to complement the portfolio with some higher risk, higher growth opportunities that we believe have real outsized potential, such as in the software, financial and information technology sectors, among others”.

Private for Longer

Since the global financial crisis there has been a clear trend that companies stay private for longer, before listing on the stock exchange. As a result, much of their growth takes place before their IPO.

Asked whether this has helped private equity companies in achieving their performance, Bosela answers that this dynamic has been somewhat of a double-edged sword for the industry.

“I think one of the main reasons why companies stay private for longer is that they are actually able to raise the capital outside the public markets from private market investors,” she says.

“It is obviously attractive to them for a number of reasons: they avoid the volatility of public stock markets, they don’t have the distraction of quarterly reporting cycles, they maintain more control and it is less expensive for the business.

“While it definitely creates more opportunities for private equity investors, there is a lot of capital trying to gain access to these opportunities and it is a very competitive landscape.
According to a Bain & Co. report, there was US$ 2.5 trillion in dry powder at the end of 2019 and US$830 billion of that was committed to buyout funds.

“With companies staying private longer, private equity investors have the opportunity to either invest in a business at an earlier stage and generate an attractive return by professionalizing the business and identifying profitable growth initiatives or invest at a later stage, buying a business from another private equity investor that has de-risked the business.

“By coming in later, they might be paying a higher valuation for the benefit of scale and lower business risk, but private equity investors are still able to generate an acceptable return through ongoing growth and other value creation initiatives.

As companies are staying private longer and often not choosing to go public at all, there are many more sponsor-to-sponsor transactions happening than there were 10-15 years ago,” she says.

This was a fantastic interview with Sandra Bosela, the Co-Group Head, Managing Director and Global Head of Private Equity at OPTrust Private Markets Group where she is responsible for jointly managing the Private Markets Group and oversees OPTrust's global private equity program. 

Her partners at OPTrust Private Markets are Gavin Ingram, Co-Head Private Markets Group, Managing Director and Global Head of Infrastructure who is responsible for overseeing OPTrust's global infrastructure strategy and investments in North America, Stan Kolenc, Managing Director (Sydney) who is responsible for Sydney office and infrastructure and private equity investments in developed Asia and Morgan McCormick, Managing Director (London) who is responsible for London office and infrastructure and private equity investments in Europe.

Interestingly, OPTrust's Private Markets does not include real estate. That portfolio which represents roughly 15% of total assets is run my Rob Douglas, Managing Director of Real Estate.

Mr. Douglas was featured in an article in Real Estate News Exchange last year and earlier this year, before the onset of the pandemic, a group of co-investors, including OPTrust, announced a major, long-term, downtown Toronto office leasing transaction at 65 King East, which was suppose to see Google occupy 400,000 square feet of office space across 18 floors in Toronto’s newest, next-generation office development.

IMCO was also part of that deal and I wrote about it here. I have no idea whether this deal is still happening or if Google walked away from the lease, but it's been a tough year for some segments of Real Estate and I'm sure Mr. Douglas and his team have been very busy. 

Anyway, back to Sandra Bosela and Private Equity at OPTrust. 

If she comes across super smart in this article, it's because she is and really knows her stuff. 

Ms. Bosela holds an Honors Business Administration degree from Ivey Business School at the University of Western Ontario, and completed the General Management Program at the Harvard Business School.

She is a board member of the Business Development Bank of Canada, an organization I know all too well as I worked there as a senior economist for two years (2008-2010) replacing someone who left on maternity leave (it's one of the better Crown corps in Canada, along with the EDC, and we worked hard back then because of the Great Financial Crisis).

Even though I never met her, my industry contacts tell me she's super smart, very nice and likes to work alongside partners in private equity.

Her team invests in private equity funds and also co-invests alongside them on bigger deals to reduce fee drag. 

Because of its size, OPTrust's Private Equity group can focus on mid-market space, which isn't where its larger Canadian peers focus as they typically invest with larger PE funds.

OPTrust manages roughly $22 billion and and roughly $2.9 billion (13%) is invested in Private Equity and the allocation will go up to 15% over the long run, so it's an important asset class in terms of providing stable and attractive yields.

Below, I provide you with a summary of long-term strategic allocation ranges which you can find in the Statement of Investment Policies here:

Keep in mind, however, OPTrust is a defined-benefit plan which has a member-driven investment (MDI) strategy, so their focus is solely on matching assets with liabilities aiming at the highest risk-adjusted returns across public and private markets.

Also, OPTrust is now the only large public Canadian DB plan which still offers guaranteed guaranteed inflation protection, not conditional inflation protection (like CAAT, HOOPP, OTPP and now OMERS).

What else? Like other large Canadian pensions, OPTrust uses leverage to take advantage of opportunities across public and private markets as they arise and to make efficient use of their capital.

But the focus is on risk-adjusted returns and making sure they deliver on their promise to members.

In her comments above, I highlighted passages where Sandra Bosela explains in detail where they focus, why they focus on certain sectors which are more defensive in nature, and why they're always analyzing their portfolio to try to figure out what can go wrong. 

She raises a good point, with interest rates at record lows, valuations are at record highs, and you're paying much higher multiples for deals but can't assume multiple expansion on exit.

All the Private Equity teams at Canada's large shops and all private market teams have a value creation plan on all their investments. They work with their partners and guys like Tim Prince at KPMG (mind as well plug him as I worked there briefly and spoke to him a couple of times) who help them execute on their value creation plan.

What does that mean in practice? Sandra goes over it in detail above, it's not just cost cutting, it's adopting new technologies to make businesses more efficient and more profitable, and a lot of other things.

What did you think, Private Equity is not simple, the easy part is writing a big check, the hard part is sitting on boards, getting to know the business and management team intimately, implementing and realizing on your value creation plan (same for infrastructure and real estate).

As Sandra states above: “Active management and governance provide a lot of benefits including access to real-time information, something that was especially valuable during the early months of the pandemic this year. Having more control over our investments and a voice at the table in shaping strategic plans and other value creation initiatives allow us to better influence the outcomes of our investments, which is important to us.”

Having more control over their investments (than say public markets which are volatile) allows them to execute better on their strategic plan and that also includes an ESG plan which was not discussed in the article above.

Next Wednesday at noon, the Canadian Club of Toronto is hosting a free virtual event on ESG and sustainable investing moderated by Mark Wiseman (AIMCo Chair) and featuring Gerald Butts (Eurasia Group)and Veronica Chau (BCG) and Alison Loat who is the Managing Director of Sustainable Investing and Innovation at OPTrust.

Join me for the @CdnClubTO's free virtual event on December 9 as I moderate a discussion with Gerald Butts (@gmbutts), Veronica Chau and Alison Loat (@AlisonLoat) on #ESG and #sustainableinvesting.

Register for the free virtual event here: https://t.co/MDSaw1Czmb

— Mark Wiseman (@MarkDWiseman) November 23, 2020

Alison and I chatted earlier this year and I'm looking forward to catching up with her after this panel discussion to get her views on responsible investing at OPTrust across public and private markets.

What else? Also on December 9th at 3 p.m., Mantle314 along with Ortec Finance, a leading provider of technology and solutions for risk/return management (helped OPTrust on its climate-savvy project), are holding a webinar on scenario analysis and climate disclosures on the The Task Force on Climate-related Financial Disclosures (TCFD). You can register for that here and it should be really interesting.

Alright, that wraps in up for me, hope you enjoyed reading this comment and I enjoyed covering Sandra Bosela and Private Equity at OPTrust.

While I enjoy talking to CEOs and CIOs, I also like covering thoughts from managing directors and senior managing directors at all of Canada's large pensions because they're working directly on deals.

Below, Steve Balaban discusses value creation in private equity. Great clip, he has more posted on his YouTube channel here.

This is now week eight of introducing the Integrated Total Fund Management ("TFM") executive series. This week, we conclude our journey into the practical implementation of TFM following the 11 case studies from Episode 5 over the last three weeks. These case studies were based on the framework and the process we discussed in the earlier episodes and provided many practical uses for TFM to solve common total fund decision challenges many institutional investors face.

However, having a framework and a process is yet not having a capability.

Episode 6 will specifically discuss a wealth of seemingly at first unrelated topics. The (official) title of the episode is "TFM: From a Framework & Process … to a Capability". The unofficial title references to the least served person in the organization, data swamps, the art of leapfrogging, Steve Jobs and the iPhone, and other unrelated subjects.

"Even if you have your framework and process, you are not even close …because this does not give you a Capability (period intended). This episode is about past mistakes, learning new things, and how to leapfrog this (often) insurmountable) hurdle."

Episode 6 today concludes the topic of TFM implementation. It is the last episode before the grand finale of the series next week, Episode 7, where we will discuss the role of TFM as part of the next stage of development of the Canadian pension model.

What is "capability," after all?

In the last couple of weeks (see here and here), we spent significant amount of time talking about the framework and the process, and we had all these case studies to illustrate the benefits of TFM further. However, a capability is so much more than a framework or a process.

Capability requires a methodology that supports the framework. It also requires proper technology to enable both the framework, the methodology, and the investment process. And it does not stop with technology, however, because you need a platform to be able to have a timely and dynamic process, the ability to look at different perspectives (asset class, country, sector and theme), visualize, slice and dice, experiment and interact with data, ideas, conclusions, and people. Finally, nothing could be done without talent and proper organizational structure. Only when one gets all these pieces of the puzzle right, then the real implementation and management begin. This seems a pretty daunting task.

JFK said it almost 60 years ago in the "Moonshot" speech, and we used it as a motto for our series: TFM - Not Because It Is Easy, But Because it is Hard. It may be challenging, but it is not impossible (unless, of course, one believes that we did not land on the moon!), and the benefits that would accrue to those who dare and succeed are numerous. This episode is for those who dare and want to succeed.

What CIOs want

TFM capability addresses what every CIO or investment committee needs, a properly structured decision-making process. In simple words, it is about making informed and consistent rather than ad-hoc decisions.

Do not get me wrong; ad-hoc and swift decisions are at times needed. Sometimes these are the only ones we have, especially in a crisis where it is about the return of capital and the organization's survival, not the return on capital.

In more general terms, what is required is a clear and consistent framework, which reduces the inherent complexity to an as simple as possible, but not simpler, and intuitive process. Such a process needs to be based on a dedicated function and clear accountability, follow-up, and focus on enabling continuous management and implementation.

Finally, what is needed is a proper technology and a platform to allow the CIO to steer the organization using proper, modern, and timely navigation instruments and radars in lieu of using angular measurements between celestial bodies and the visible horizon to locate one's position at sea. The presentation further specifies a detailed list of requirements for the TFM capability to achieve what CIOs want.

What CIOs actually get

We discussed what CIOs want, but it is also essential to discuss what CIOs actually get. Behind the façade of a shiny steel and glass building, this perception of a tangled patchwork of processes and technologies may eventually negatively impact decisions.

Unfortunately, more often than not, decision-making falls hostage to several organizational challenges. Some of these challenges relate to the lack of continuity, permanent, temporary patches and fixes while waiting (again) for Godot's next Big Bang system initiative, budget constraints and prioritizations where some are more equal than others. Being lost in translation in the endless patchwork of interfaces to translate data from incompatible systems and applications, the lack of straight-through processing opens up the door for lurking mistakes which could easily question the compliance with the fiduciary responsibility to safeguard clients' assets.

And then comes the topology terminology – you have probably already heard about the data pools, data lakes, and what they often become (data swamps).

It is challenging to make consistent and coherent decisions with inconsistent and incoherent data and information. Or using a month's or sometimes, even a quarter-old data for timely decisions. And wait if a crisis hits – all these headaches turn into an acute migraine. Where is my "war room"? Which data to believe? Who will compile it quickly? What am I reporting to stakeholders? Is my process institutionally robust and not just excel heroics?

It is also astounding to sometimes see the struggle within – the undertow of resistance to systems and automation in fear of losing relevance or the job and all that comes with it – salary, benefits, pension. This is the tacit culture that sometimes permeates the organizations.

Faced with these challenges, in many parts of the organization, people "tactically withdraw" under the banner of "think global, act local" and resort to having their local data and systems until better days. This situation, unfortunately, leaves the CIO as the least served client in the organization. It is lonely up there at the top, and it could also be quite foggy looking downhill.

The Request – A Greek tragedy in five parts

"Thinking global and acting local" often creates the challenge of getting total fund aggregate information for the CIO or investment committee decision-making. People might have found their own way to get the information they need, but the real challenge and panic come when the CIO or CEO request information now. I have seen it happen too many times, and I decided to capture its frantic dynamic in a short cinematic Greek tragedy (it is Leo's blog, after all!). It is called "The Request" and describes the events unfolding following an urgent request by the CIO on a beautiful Thursday end of the day, just a day before the weekend. I do not want to spoil the experience, so you have to watch it to believe it.

According to the dictionary (in ancient Greek theatre), it is a play in which the protagonist, usually a person of importance and outstanding personal qualities, falls to disaster through the combination of a personal failing and circumstances with which he or she cannot deal." Quite appropriate.

After reading several papers by Ken Akoundi, founder and chief knowledge officer at Cordatius LLC (a derivative of "wisdom" in Latin, https://cordatiusllc.com/), I first came across this story. In his own words, Cordatius is about the belief in the power of technology to transform the investment offices and that investors have fallen too far behind the technology curve. They are at crossroads and need a spark to modernize and evolve the investment office.

Ken certainly knows his stuff, given his extensive experience as a Ph.D., a quant and a programmer at J.P. Morgan, head of pension strategies at Deutsche Bank, and a chief knowledge officer at RiskMetrics, to name a few.

When I read the papers, many things resonated deeply with me as I have experienced such situations many times myself. He articulated some of the notions so eloquently, and I have to admit, I even chuckled for a bit and had to include some of his brilliant insights as these insights feed right in the topic today. If you are struggling with some issues in the nexus of technology needs and solutions for the investment office, reach out to Ken. This is not a promotion of any form. I never met or spoke to Ken before (but I will, and so should you).

Asset-rich, but technology-poor: Why organizations often fail at TFM?

"Asset-rich, but technology-poor" is yet another of Ken's powerful phrases. But why does this happen?

I had to link all my experiences, observations and past failure to answer why all this happens. Most importantly, this would answer the question, what to do to succeed? Here is a (not so short) list of suspects. I am sure you have your own (extended) list:

If you are now experiencing this emotional roller coaster of excitement for the possibility of TFM and the challenges to implementing it, let me bring you up. Any challenge has its solution. All the next sections are about how to succeed or the fine art of leapfrogging.

The fine art of leapfrogging: What I learned from past mistakes

How can we achieve the TFM capability? Can we leapfrog? The answer is yes, but one needs to be strategic about it.

There is a perfect reason why we have Steve Jobs in the picture below. This is because the iPhone's concept, as a product and technology, illustrates one of the biggest mistakes investment offices venturing into improving their technology, data, and decision-making processes make. They are not focusing on the wrong thing to do.

Apple did not manufacture the iPhone parts. These parts already existed. What Apple had was the design framework of what the iPhone should do (texts, photos, e-mail, and internet browsing). And by the way, the customers did not yet know this either, so it was not driven by demand. Apple created the demand itself. The second thing Apple had was the operating system, iOS. The operating system allows you to make all the various parts from other providers work.

So, you should by now see the analogy. The biggest mistake is to try and produce all the "iPhone parts" internally, no matter if the organization thinks it has budgets, talent and resources. Even "asset-rich," the organization may be "technology-poor" because other influential organizational factors are at play. There was a reason we spent considerable time at the beginning of the organizational challenges. It would help if you had a different, entrepreneurial environment, at the forefront of technology, methodologies, and data, and "at arm's length" from the organization. There was a good reason why many Canadian pension funds were also structured as at arm's length from the government and politicians.

"Internalization" does not mean to do everything internally. The organization needs to internally develop its "operating system"– the framework, process and methodology, and then to find a strategic partner and seed capital to acquire the platform and technology, which should include as well efficient data management. Focus on what having one "iPhone" will help you do across many functions (after all, TFM is about improving efficiency). Focus on methodology, strategy, decisions, and portfolio construction, implementation and having it actionable sooner.

The TFM capability game plan: Rethink your systems

Most of the systems you have are risk systems (Barra, Axioma, Aladdin, etc.) and are typically used mostly for reporting, compliance, or reactive to specific situations or requests. Risk systems are not decision systems, although they are an essential contributor. What you need is decision systems to evaluate RETURN expectations. But not return expectations in isolation but as part of a coherent and consistent macro and market valuation, cycle, liquidity and sentiment, and thematic framework. The TFM Framework is a blueprint for this.

Some of the established risk system names have woken up to the need for decision systems. Are they too big to be able to address this need? The older technology and architecture would be difficult to adapt; many are "cash cows" for their shareholders. One needs to be careful with "stretched promises," which are often used to tame requests. That said, they have money, a market share, and can make acquisitions.

The TFM capability game plan: A start-up mentality and offsetting costs

Although one may have a budget, building in-house is very expensive, considering all aspects – it could quickly go to $60-100 million. And then, you have all the aspects of expertise, people, developers, to name a few. A solution may be to have a strategic partner, seed capital, build a custom-made system, and then enhance it with your experience and commercialize it to offset the cost. Your name will help marketing too.

Consider acquisitions (more about it next), and build it in a modular fashion so that it could serve multiple client bases and purposes (pension funds, asset managers, SWF, family offices, insurance companies, advisors, consultants, outsourced CIO, as well as a basis for portfolio product offerings).

This requires a start-up risk mentality. The fintech/invest-tech/wealth-tech market is highly fragmented with a high potential for consolidation and a "winner takes it all" structure. There are many small entrepreneurs, of 1-2 brilliant brains and ideas, which is the excellent news… The bad news is that they would probably never succeed unless integrated and bought out to larger platforms. Such firms can only survive if they can have a financially stable back upper with the potential to further commercialize the business directly via partnerships and acquisitions, or indirectly, via product development and industry presence. Which one would disappear, survive or be bought out next month?

The TFM capability game plan: Open versus locked platforms

With technology, methodologies, and tools evolving exponentially, you need an open Software-as-a-Service ("SaaS") platform where users generate their investment insights. It needs to be "opened" to 3rd party vendor content (e.g., data, thematic research, broker views, economic forecasts) and the capability to integrate the client's own firm's internal views and intelligence insights, user's own data to build signals and strategies.

Pre-built tools and frameworks need to be open to customization of inputs and preferences by the user. Similarly, the methodology and inputs for all tools, model frameworks, and systematic strategies to be 100% open and transparent to all users (white box, as opposed to a "black box")

The TFM capability game plan: Aggregation versus integration

Any platform, old or new, can aggregate things. One can add them, and "beautify" them (Ken's expression again!), create a nice front end to consume the data. Aggregation means adding things and making it easy to access them. Even if a system is an open one, it does not mean that it is an integrated one. Aggregation is handy but is easily replicable and an inferior TFM proposition. One needs integration, which means all services and your core TFM capability are interlinked.

For example, if your core TFM capability allows you to link macro and markets to public asset classes, and your outside service, which you just acquired, links private assets to public assets, you can now link these two. As such, now you make conclusions on the behavior of the private assets given the changes in the market and macro environment (the public assets now play the role of a translation mechanism).

Now imagine you add another service, stress testing, which creates conclusions about the public asset classes. Because you already have the link to the private asset classes, you can now make conclusions on the impact of stressed market conditions on the private asset classes. This is now powerful because it could cross-link services.

The TFM capability game plan: The platform approach

In private assets, platform investments are a great way to have a foot on the ground (like a foreign office), specialized expertise, access to talent, reputation, and a way to source transactions, even further expanding the platform (M&As, and other forms). You could do the same with your TFM platform.

This way, you could have direct access to the forefront of technology, new data, methodologies. Access to specialized expertise and a talent hub. Pursue accretive acquisitions or other forms of aggregation and integration. Also, to an extent, insulate the TFM framework from internal plights (change in leadership, budget variations [remember, it is self-sufficient and commercialized], internal politics and "hostile takeovers").

The TFM capability game plan: Start-up risk management

If pursuing the TFM capability via a start-up, it is important to close any technological and IT security gaps, regulatory requirements, including full code documentation (necessary if your start-up fails and you acquire the code to use it further internally) and have the initial gaps and closed gaps audited/vetted.

Also, have an audited/vetted investment process related to the various signals and insights generations and data quality and maintenance. This is not money thrown out, as first, it is required so that you can de-risk your investment, there are regulations which you don't want to breach (reputation), but also, other investors will come, and they will be more comfortable to have all these steps already done. This is accretive to the value of the start-up. This is all key to your risk management and initial value creation,

A Strategic partnership with ClearMacro: A unique transaction at BCI

There is a reason why I was able to talk about TFM in detail, both from an academic but also from a practitioner's point of view. This is because this is a road I have travelled. It led to a unique TFM-related transaction that I spearheaded at BCI as a Vice President and Head of Total Fund Management to enable the development of TFM. This is the proper place to thank my colleagues Steven Henderson and Anand Rakesh, for the enormous help on this transaction and all its elements. It took us more than a year to finalize.

I cannot talk about it more for the obvious reasons, but this is an example of a strategic transaction for creating value in the organization's investment management in collaboration and synergy with the Private Equity team. I also have to thank Jim Pittman, the Head of Private Equity at BCI and Kevin Sarafilovic, Senior Portfolio Manager, who worked tirelessly on the deal structure.

I am proud to have enabled BCI for future growth and put the organization among these distinguished investors below, based on the DiligenceVault 2019-2020 reports.

Finally, ClearMacro is an example of a platform that could enable building your own TFM framework and process. It is an example of the benefit of a strategic partnership with like-minded investors and professionals pursuing innovation and better investor decision-making.

Overall Episode 6 Takeaways:

•  TFM addresses many of the critical needs of CIOs and investment committees for informed decision-making…
• ...but faces many challenges in today's "asset-rich, technology- and process-poor" organizations… 
•  …. which are fraught with a patchwork of processes and technologies may eventually impact decisions • Organizations need to rethink existing approaches and practices and venture to become "asset-, technology- and decision-rich" fiduciaries of their client assets 
• Most asset owners already have some of these capabilities and have been applying these principles when investing with partners across businesses and geographies 
•  It is now time to loop back and apply these same principles to address any investment decision-making challenges internally. Many examples of such proactive and innovative strategies already exist

This concludes the complete Episode 6.

Next Thursday, we will conclude our series with the final Episode 7, where the functional role of TFM transforms into a structural role that comes to serve a bigger and better purpose: A vision for the Canadian Model 2.0.

***

I want to first thank Mihail for another great comment where he covers TFN capability.

I will try to keep my comments brief but pertinent.

As Mihail states at the top, TFM capability requires a methodology that supports the framework. It also requires proper technology to enable both the framework, the methodology, and the investment process.

You can have the best investment minds, a great framework but if you lack methodology and don't have the proper technology to enable both the framework, the methodology, and the investment process, then you're not only inefficient, you're not exercising your fiduciary duty as a pension fund manager.

I haven't worked as long as Mihail in the pension world but worked long enough to see firsthand a few "Greek tragedies" because either the framework was wrong, the governance was wrong or the technology was shoddy rendering the entire investment process obsolete.

If you've worked anywhere long enough in the investment management industry, not just pensions, you have your share of "technology scars" and other scars too.

Typically pensions like to build things internally because they think it costs less and they have more control.

That's theory, what happens in practice is it ends up costing a lot more when you fix all the glitches and it can cost a lot more when your technology impacts your organizational nimbleness to act swiftly and decisively.

Often, buying things off the shelf makes sense but that too is costly and requires a lot of work to integrate and customize.

Mihail talks about a third solution, partnering up with a start-up and providing it with the seed capital to grow and nurturing it as you develop the TFM system.

He rightly notes that he enabled BCI for future growth and put the organization among distinguished investors based on the DiligenceVault 2019-2020 reports and he worked hard finding, vetting and nurturing ClearMacro, a platform that enables building your own TFM framework and process. 

As he states, "it is an example of the benefit of a strategic partnership with like-minded investors and professionals pursuing innovation and better investor decision-making." (see my comment on ClearMacro here).

What else? Mihail rightly notes there are great risk systems (Barra, Axioma, Aladdin, etc.) that are used mostly for reporting, compliance, or reactive to specific situations or requests but "these systems are not decision systems, although they are an essential contributor. What you need is decision systems to evaluate RETURN expectations."

And here, I'd like to add something, even if you have a great 'decision system', you always need to complement it with outstanding quantitative and qualitative work.

When I was working right next to Mihail at PSP, my job was to write reports where I mostly qualitatively analyzed things and pretty much questioned everything. Why do we want Private Equity, Infrastructure or commodities? 

It was my job to write reports, go the Board with my findings and defend them. Mihail helped me a lot with quantitative (and qualitative) analysis and we often just reflected and discussed things with ourselves, our boss and our colleagues.

What I'm getting at is a TFM framework, methodology and decision system sounds great but it's only as good as what you put in it and if it's garbage in, it's garbage out.

There are some things that are easy to program, other things that are much tougher.

For example, right now, we might be in the midst of a profound secular shift in real estate.

We might be, I honestly don't know and to be truthful, neither does Bruce Flatt, Bill Gates or the heads of Real Estate at all Canadian pensions.

These type of structural changes are typically insidious but their effects long-lasting, which is why people are nervous right now on real estate.

Large pensions will tell you "over the long run" but what if this is a secular shift and you're underestimating it? It can cost your pension and your members dearly over the long run.

Again, I'm not saying there is a profound secular shift going on, but there's definitely something going on and you need to have the right senior analysts to internally question these large shifts no matter where they're occurring.

That brings me to another topic Mihail touches upon, career risk. Typically at large pensions, people are managing career risk, and that comes first, not what's in the best interests of their members and stakeholders. 

In order to improve TFM capability, you need to set the right culture where employees aren't managing career risk but are actually encouraged to think outside the box and act in the best interest of members.

And that culture is set by the CEO and is carried out by everyone else beneath him or her. 

I cannot emphasize how important it is to get the culture right to improve TFM capability.

Lastly, I too would like to plug Ken Akoundi of Cordatius, I invite all my readers to read the papers posted on their site and to subscribe to Investor DNA to get a great daily email with links to important stories in finance and other areas. It truly is a welath of information.

Alright, let me wrap it up, I can talk a lot more on this topic but I want you to listen to Mihail.

Below, Episode 6 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 stuff, please take the time to listen to it, take a lot of notes, there are tremendous insights here.

Stocks rose to record levels on Friday, notching another weekly advance, as traders shook off a disappointing U.S. jobs report.

The Dow Jones Industrial Average closed higher by 248.74 points, or 0.8%, at 30,218.26. The S&P 500 gained 0.9% to end the day at 3,699.12, and the Nasdaq Composite advanced 0.7% to 12,464.23. All three of major indexes posted intraday and closing record highs.

Chevron and Caterpillar rose 3.9% and 4.3%, respectively, to lead the Dow higher. Energy was the best-performing S&P 500 sector, gaining 5.4%.

Friday’s jump led major averages to for their fourth weekly gain in five weeks. The Dow rose 1% this week. The S&P 500 gained 1.7% over that time period. The Nasdaq Composite rallied 2.2% this week.

The U.S. economy added 245,000 jobs in November. That’s well below a Dow Jones consensus estimate of 440,000. The unemployment rate, however, matched expectations by falling to 6.7% from 6.9%.

However, some traders saw the weaker-than-expected number as a positive because it could pressure lawmakers to mover forward with additional fiscal stimulus.

Friday’s jobs report data “is beckoning lawmakers to act on additional fiscal stimulus measures in order to bridge the output gap in the economy until a vaccine is deployed and the longer they hold out the wider the gap may become,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

Senate Minority Leader Chuck Schumer tweeted the report “report shows the need for strong, urgent emergency relief is more important than ever.”

This latest jobs report shows the need for strong, urgent emergency relief is more important than ever.

Senator McConnell must hear the pleas of the millions of struggling American families.https://t.co/e9SRXDGrVX

— Chuck Schumer (@SenSchumer) December 4, 2020

President-elect Joe Biden also called for more stimulus, noting Friday’s report foreshadows a “dark winter.”

JJ Kinahan, chief market strategist at TD Ameritrade, noted the report “was not as bad as it seems” in part because a chunk of the lost jobs came from the U.S. government as the 2020 Census count wrapped up.

Kinahan also noted “it’s really hard to estimate what these numbers are going to be when states are going from being completely shut down to being completely open. I think you’re seeing that in the market’s reaction.”

Brad McMillan, CIO for Commonwealth Financial Network, also pointed out that average hours worked “remained strong” last month, “suggesting that overall labor demand remains healthy, and the drop in the unemployment rates suggests the labor market continues to tighten.”

Friday’s report comes as the number of coronavirus cases has been rising sharply. The U.S. reported record numbers on Thursday of new infections, single-day deaths and hospitalizations.

Alright, it's been a long week and there is a lot to cover in markets.

The first week of trading this month was very much like the last month of trading, very bullish price action across all sectors, especially in the energy sector (XLE) which led all other sectors this week:

Over the past month, Energy (XLE), Financials (XLF), Industrials (XLI) and Materials (XME) -- ie, cyclical sectors -- have outperformed the broad market considerably and Tech (XLK) has been holding on which is why we are seeing record close in the Dow:

And while Exxon (XOM) and Chevron (CVX) are leading the energy ETF (XLE) higher (they make up 50% of this ETF), the real big gains have been coming from Occidental Petroleum (OXY), Devon Energy (DVN) and Apache (APA), all up 70% or more over the past month.

So what is going on? We are in the midst of a dark COVID winter and cyclical stocks are rallying, especially early cyclicals like energy and materials. Why?

Well, a few things are going on but let me post some charts to help you visualize:

• The US dollar (UUP, the first chart, is the ETF) has been weak all year and is getting weaker. Some market pundits think it's headed back to 2018 levels or lower. A weaker US dollar is generally very supportive of higher commodity prices which is why Energy (XLE) and Materials (XME) have been rallying.
• A weaker US dollar has also spurred growth outside the United States which is why you see emerging markets shares (EEM) rallying hard this year led by Chinese shares (MCHI). 
• But it's not only emerging markets, European shares are rallying now which is why the iShares MSCI EAFE ETF (EFA) is making a new high 5-year high. 
• A lower US dollar and growth outside the US is what's driving Industrials (XLI) to a new 5-year high in the US led by companies like Boeing (BA), Caterpillar (CAT) and General Electric (GE), all of which have performed well over the past month.
• All this has renewed hopes of a global synchronized recovery in 2021 which is why US long bond yields are backing up (TLT is US long bond ETF), spurring Financials (XLF) higher.
• But it's Energy (XLE)and Materials (XME) shares which have rallied the most over the last month because they got clobbered the most earlier this year when the pandemic hit. Again, a weak US dollar and global economic recovery bodes very well for Energy (XLE), Materials (XME) and Industrials (XLI) so we shouldn't be surprised by this price action.

What else? A couple of more things to keep in mind:

• By the looks of it, the market is sniffing out another stimulus package before Christmas. President Trump announced this week he is looking to run again in four years and I'm betting he's cooking up a big fat stimulus package for Christmas and I think traders are positioning for this. Today's US jobs report spurred the Democrats to call for a bigger package and both Republicans and Democrats will find a middle ground.
• The Federal Reserve is meeting in a couple of weeks and if there's no stimulus announcement, it might announce more QE, or at least that's what the market is hoping for. More QE is dollar bearish and commodity bullish.

On commodities, earlier today, Canaccord Genuity's Martin Roberge sent me his weekly market wrap-up going over his Outlook 2021 themes:

Another week, another closing high for most US indexes. Despite concerns that lockdowns have begun to dent economic growth, there has been little progress on the coronavirus relief plan, and there are potentially supply/deliverability issues with vaccines. The S&P/TSX is only ~500 points away from its all-time high of 17,944 reached on February 20, while the speculative S&P/CDNX is already marking new highs. These two resource-heavy indexes continue to benefit from firming commodity prices, fueled by strong Chinese economic data and marked US$ weakness with the DXY breaking below the 92 support level this week. The next support is the 2018 low of 88, our 2021 year-end target. Undoubtedly, investors’ bullishness is rampant. On a scale of 1 to 5, our sentiment and positioning indicators are at 4. Historically, strong Novembers have been followed by positive Decembers, and investors seem willing to look beyond potential pullbacks and stick around for the typical Santa Claus rally. The price to pay could eventually be that the market is stealing returns from 2021. 

After hunkering down for most of November, we published our Outlook 2021 report this Tuesday. For those who could not attend our conference call Wednesday, the replay is available here. As our Chart of the Week shows, there are four themes that we believe will play out in 2021: commodities > stocks > bonds; small caps > large caps; non-US > USstocks; and value cyclicals > value defensives. The macroeconomic backdrop fueling these rotations is one where global growth accelerates. But contrary to past recoveries, the particularities of the 2021 recovery are that: China is the main growth engine, consumption spending is geared toward goods rather than from services, the inventory re-stocking cycle is global and occurring earlier than usual, and the US$ is in a well-entrenched bear market. On the latter, this is much different than the post-GFC recovery in 2010 when the Greek and European sovereign debt crisis kept the US$ well bid. Tack on the fact that China is in the driver's seat, and this business cycle may look like the one that ran from 2003 to 2008, the last super-cycle for commodities: hence our three annual contrarian calls on NA oil integrateds, gold miners and fertilizers.

I urge all my readers to take the time to listen to Martin's conference call here and to read his Outlook 2021 report here.

In an email exchange, I asked Martin a few questions:

Would you say 2021 is another synchronized global growth story?

Yes but with different tilts or tailwinds than the post-GFC recovery as you read my note well. This one will look more like 2003-2008 as my note explains, a very bullish backdrop for commodity prices.

Also, what are your thoughts on the big rally of re-opening stocks and hyper-growth stocks like Zoom (ZM), DocuSign (DOCU), Zscaler (ZS), Snowflake (SNOW), etc.?

I am in the Growth = Value camp. You have to have both styles because the global economic rebound of ~5% in 2021 is not the same late-cycle growth rate of 5% seen in 2000 when the output gap was closed. So I am certainly not in the 2000 growth-to-value camp. Also, the consumption geared towards goods and the flatter-than-normal yield curve will cap the profitability rebound of certain value stocks, hence their valuation rebound as well. For example, with the recent rally, Canadian banks are already trading ~12x forward EPS. How much higher can they go?

As for hyper-growth stocks, the reciprocal of a 1% US 10Y treasury yield is 100x. Or let’s take investment grades with a yield at 3.2%, the reciprocal is 31x which is exactly where the US technology sector trades at. My point is that you need a strong back up in bond yields to crimp multiples. I believe this could start if US 10Y Treasury yields climb above the previous support of 1.3%. But I am not there and still believe we will finish the year around 1%. Thus I would leave hyper-growth stocks alone and focus not on the value > growth tilt but on the rotation within value, that is, the value cyclicals > value defensive tilt.

I can't thank Martin Roberge enough for sharing this with my readers and urge all my institutional readers to subscribe to his research and support him (great guy, he has been doing this for a very long time and really knows his stuff, just email him at mroberge@cgf.com).

Alright, I'm going to wrap it up there, but before I do, take a look at the performance of some value stocks over the past month:

Below, Yahoo Finance's Julia LaRoche spoke with Paul Tudor Jones hedge fund manager and founder of Tudor Investment Corporation. The legendary macro hedge fund manager expects "an explosion" of economic growth next year as a coronavirus vaccine becomes more widely available.

Next, Liz Ann Sonders shares her perspective on the US markets and economy as we head into 2021.

Lastly, watch yesterday's CNBC Halftime Report to understand why some people are calling it the Nothing Matters Market. 

I'd say a lot of things matter, chief among them, more stimulus and more QE. Without that, this market is dead and along with it, the global economic recovery everyone seems to be betting on.

Prime Minister Justin Trudeau announced Monday that Michael Sabia, the former Quebec pension fund CEO and current chair of the Canada Infrastructure Bank, will be the next deputy minister of Finance Canada.

Mr. Sabia will replace Paul Rochon, who announced last week he was leaving the department.Mr. Rochon's announcement came a day after Finance Minister Chrystia Freeland released a fall fiscal and economic update that said Ottawa will be working on a post-pandemic recovery plan that could cost as much as $100-billion over three years.

The deputy minister is a senior public servant in a department. The job involves providing non-partisan policy advice to the minister, overseeing the management of the department and working on government-wide policy issues with other deputy ministers.

Mr. Sabia will start his new position on Dec. 14.

"The Prime Minister took the opportunity to thank Paul Rochon for his dedication and service to Canadians after having served the past six years as Deputy Minister of Finance," the Prime Minister's Office said in a statement.

Monday's announcement said Mr. Rochon will move to the Privy Council Office as a senior official.

Just eight weeks ago the government named Mr. Sabia as chair of the Canada Infrastructure Bank, a Crown corporation with a $35 billion budget that is mandated to attract private capital investments for large domestic infrastructure projects.

In October, Mr. Sabia appeared alongside the Prime Minister to announce a $10-billion plan for the bank that would see it focused on environmentally-themed projects and contribute to a post-pandemic economic recovery.

Mr. Sabia has long been a voice of influence with the Trudeau government. While he was still CEO of the Caisse de dépôt et placement du Québec, the provincial pension plan, he was part of an economic advisory panel that provided recommendations to Ottawa. That panel recommended the creation of the infrastructure bank as well as significant increases to Canada's immigration targets, which the government later supported.

Prior to leading Quebec's pension fund, Mr. Sabia was CEO of Bell Canada and Chief Financial Officer for the Canadian National Railway. He has also worked in the federal public civil service, including the Finance Department and the Privy Council Office.

Infrastructure Minister Catherine McKenna told The Globe and Mail earlier this year that since he joined the infrastructure bank, Mr. Sabia has been a trusted source of advice as the cabinet considers options for a post-pandemic stimulus package.

Ms. Freeland's recent update said the size of this year's projected deficit rose from $343.2-billion estimated in July to $381.6-billion. The update also said the deficit could be closer to $400-billion if the pandemic worsens over the final months of the fiscal year. 

Erik Hertzberg and Kait Bolongaro of Bloomberg News also report that Trudeau names Michael Sabia as deputy finance minister:

Prime Minister Justin Trudeau named Michael Sabia, former chief executive officer at Caisse de Depot et Placement du Quebec, as the top bureaucrat at Canada’s finance department.

The appointment is effective Dec. 14, according to a statement Monday from the prime minister’s office. Sabia’s predecessor in the role announced his decision to retire last week after Trudeau’s government detailed a budget deficit this fiscal year of $381.6 billion (US$298 billion), or 17.5 per cent of gross domestic product.

The deputy finance minister is the country’s third-highest ranking policy maker on economic matters, after the finance minister and Bank of Canada governor. Maclean’s magazine first reported news of the appointment Sunday night.

Sabia will be tasked with helping put together a post-pandemic stimulus package worth as much as $100 billion. The funding was promised by Finance Minister Chrystia Freeland in her first fiscal update since taking the reins from Bill Morneau, who resigned in August after a public rift with Trudeau.

Sabia stepped down as head of the Caisse — Canada’s second-largest institutional investor, with $333 billion in assets under management as of June 30 — earlier this year, before taking over as chairman of the state-run Canada Infrastructure Bank in April.

He has been an aide on economic policy issues for Trudeau’s government since the Covid-19 pandemic began, and was chief executive officer at BCE Inc., the nation’s biggest telecommunications company, from 2002 until 2008.

Paul Rochon, the outgoing deputy minister, will become a senior official at the Privy Council Office, Trudeau’s office said.

Alright, before I get to Michael Sabia's nomination, hot off the presses, the Caisse de dépôt et placement du Québec (CDPQ) just announced that Macky Tall has resigned from his positions at CDPQ and its subsidiaries:

Mr. Tall has accepted a position with a U.S. private investment firm, which he will start in Spring 2021 following a cooling-off period. 

CDPQ announces a change in the structure of its Real Assets group, which is based on the talent and expertise developed within CDPQ.

Accordingly, the following appointments will be effective on January 1, 2021:

• Jean-Marc Arbaud, Managing Director, CDPQ Infra, since September 2018, is promoted to President and Chief Executive Officer of operating subsidiary, CDPQ Infra. He will report directly to the President and Chief Executive Officer of CDPQ. In this role, he will continue to be responsible for the team and for developing and managing projects piloted by CDPQ Infra, in particular the Réseau express métropolitain (REM).
  
  Jean-Marc Arbaud’s experience includes eight years at SNC-Lavalin and, from 2005 to 2011, he served as President and Chief Executive Officer of InTransitBC, concessionaire for the Canada Line, Vancouver’s electric, automated public transportation system. Before joining CDPQ Infra, he also held senior positions at Power Global and was president of Infra‑Diagnox.
   
• Harout Chitilian, who served as Executive Director, Corporate Affairs and Development, CDPQ Infra, is appointed Vice-President, Corporate Affairs, Development and Strategy, CDPQ Infra. As such, he will directly support Jean-Marc Arbaud in executing and developing CDPQ Infra’s business strategy. 
  
  Before joining CDPQ Infra, Harout Chitilian was a consultant for various companies specialized in information technology and telecommunications. He was Chairman of the City Council before becoming the Vice-President of the Executive Committee of Montréal, where he was responsible for information technology and the smart and digital city project, until 2017.
   
• Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure and member of CDPQ’s Executive Committee, will report directly to the President and Chief Executive Officer. The Infrastructure portfolio he leads is expected to double in the next four years, reaching $60 billion by 2024.
  
  Emmanuel Jaclot has been Executive Vice-President and Head of Infrastructure since June 2018. In this role, he already holds responsibility for CDPQ’s global infrastructure strategy and investments. Before joining CDPQ, he was Senior Vice-President at Schneider Electric, a global leader in energy management, in London. From 2007 to 2015, he was Deputy CEO at EDF Énergies Nouvelles, a subsidiary of EDF specialized in renewable energy, in Paris. His past experience includes managing major international mergers and acquisitions, through which he developed a dual expertise in investing and asset management. 
   
• Martin Laguerre, currently Managing Director, Capital Solutions at CDPQ, is appointed Executive Vice-President, Private Equity and Capital Solutions. In this role, he will report directly to the President and Chief Executive Officer of CDPQ and become a member of the Executive Committee. 
  
  Martin Laguerre has over 20 years of experience in private equity and finance. Prior to joining CDPQ in 2019, he was Senior Principal, Power and Renewables at Canada Pension Plan Investment Board (CPPIB, now CPP Investments) in New York. He previously held the position of Managing Director, Global Power and Water Division and Renewables at General Electric, as well as various positions in investment banking and investment management at global financial institutions.
   
• Lastly, a new Chairman of the Board for Ivanhoé Cambridge will be appointed to replace Macky Tall at the beginning of 2021.

“This evolution of our structure demonstrates the depth of expertise our organization can count on and the work accomplished by these leaders in recent years. I would like to thank and congratulate everyone on their new positions at CDPQ. Their advancement is both a source of pride for me and a confirmation of the immense talent that we have built up over the years,” added Charles Emond.

Wow! I can't say I'm surprised, after all, Macky Tall was hand-picked to succeed Michael Sabia at CDPQ and there was even white smoke pointing to an imminent announcement, but in the end the government of Quebec appointed Charles Emond to succeed Sabia for reasons I discussed here.

I'm not going to get into a long detailed discussion on Macky's resignation, suffice to say I think it has been in the works for some time and he will be sorely missed.

Importantly, Macky Tall was a powerhouse at CDPQ. He was literally in charge of the most important files at CDPQ while Michael Sabia was the CEO and even after Michael left, reporting to Charles Emond.

To say his departure represents a huge loss for the organization isn't an understatement. The man spent 16 years of his life at CDPQ, he wasn't selected to be CEO and he is rightly moving on to a US private investment firm where he will find his next challenge and be compensated appropriately (not that he wasn't compensated well at CDPQ but I suspect he will be compensated more and have more upside in his new role).

[Update: Macky Tallwas named co-chairman of The Carlyle Group's infrastructure group. He will joinBrooke B. Coburn, deputy chief investment officer of Carlyle's real assets business and currently sole chair of the infrastructure group, according to a news release Monday.]

As far as the moves CDPQ made, those were in the pipeline. Jean-Marc Arbaud is appointed President and Chief Executive Officer of operating subsidiary, CDPQ Infra, but he was already managing this subsidiary. 

From what I heard, "he's brilliant" and is "the reason why the REM is a success" but he's also made some mistakes along the way.

As far as Martin Laguerre being appointed Executive Vice-President, Private Equity and Capital Solutions, I don't know him but I trust Charles Emond's judgment and he knows and trusts Mr. Laguerre or else he wouldn't have appointed him to this critically important position. 

And Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure since June 2018, will continue in his role being responsible for CDPQ’s global infrastructure strategy and investments, building out major platforms with global partners, except he now reports to Charles Emond (makes perfect sense since CDPQ doesn't have a CIO in charge of Public and Private Markets).

***

Back to Michael Sabia. Are you surprised? I'm not, I even predicted it on my blog months ago that he will one day return to his roots, the federal government, much richer, much wiser and with a ton more experience.

Prime Minister Justin Trudeau has made plenty of bonehead moves as the leader of Canada, appointing Michael Sabia to the most powerful role in the federal civil service wasn't one of them.

Why is this the most powerful role in the federal civil service? Well, I don't consider Tiff Macklem as part of the federal bureaucracy as he has independence at the Bank of Canada and Ms Freeland is the Finance Minister who will rely heavily on Sabia's advice.

I've said this before and I'll say this again, Ms. Freeland is a lightweight when it comes to economic policy, an economic journalist who didn't have the requisite experience for this important role (say what you want about Bill Morneau, he had the requisite experience but Trudeau threw him under the bus following the WE scandal and appointed Freeland to dole out goodies to everyone in need because of the pandemic, a classic Liberal response in every crisis to buy votes).

Also, notice how the outgoingdeputy minister of Finance Canada Paul Rochon will move to the Privy Council Office as a senior official.

For those of you who don't know, PCO basically supports the Prime Minister's office, it's not by accident that Mr. Rochon will move there (keep your friends close and your enemies closer). 

And what about Michael Sabia's nomination to deputy minister of Finance Canada? That too, wasn't an accident. Carolyn Wilkins, senior deputy governor at the Bank of Canada, was rumored to replace Mr. Rochon and she would have been a formidable deputy minister of Finance Canada (in many ways, much better than Sabia except she lacks his private sector and infrastructure experience).

So why Michael Sabia? Well, as alluded in the articles above, Sabia has longstanding ties to the Liberal Party of Canada, he's very well connected with senior government officials including the PM, and he has ties to some of the most powerful families in Canada who also support the Liberals.

Michael Sabia is as solid as you can get to be the deputy minister at Finance Canada. He won't be taking marching orders from Ms. Freeland but he will be advising her every step of the way, and she needs solid advice.

Lately, Ms Freeland has been ruthlessly attacked by Conservative MP Pierre Poilievre who has been on a roll demolishing Liberal hypocrisy and criticizing their economic policies:

The real story behind the abrupt resignation of Canada’s top finance bureaucrat just a day after the fiscal update. pic.twitter.com/ORHl7bpiuK

— pierrepoilievre (@PierrePoilievre) December 4, 2020

Folks, lock away your money.

Liberals are worried you're saving too much.

They want "ideas on how the government can act to unlock" those savings.

No, Trudeau, people's savings don't belong to you.

Keep your hands where we can see them. pic.twitter.com/p0bfokpibl

— pierrepoilievre (@PierrePoilievre) December 5, 2020

My advice to Ms. Freeland, please stop peddling wacky, nonsensical ideas, take the time to listen to Michael Sabia.

I also have advice for Michael Sabia. You couldn't win over Macky Tall to be the next CEO of the Canada Infrastructure Bank but you should reach out to Brian Romanchuk of the Bond Economics blog and former senior fixed income analyst at CDPQ.

I worked with Brian at BCA Research and CDPQ, he's not only super sharp -- he has a PhD in electrical engineering and he might as well have one in modern monetary theory (MMT) -- he's super nice and  really understands fiscal and monetary policy and can provide Finance Canada with incredible policy advice.

Let me put it in a way that both Sabia and Freeland can understand, if you're going to reshape Finance Canada into a powerhouse, you'd better hire the best talent in the country, and Brian Romanchuk is one of the best (he's also Ukrainian-Canadian like Freeland).

What else? What happens to the Canada Infrastructure Bank? It will go on under the new leadership of Ehren Cory but I simply can't see how Michael Sabia can remain its Chair of the Board.

Why? Simple. Sabia is now the country's top civil servant, a very political job, he cannot politicize things that are going on at the Canada Infrastructure Bank.

Good governance requires him to immediately step down from that role and if it's one thing Michael Sabia knows very well, it's good governance.

A friend of mine thinks Sabia wanted out of that role anyway. "It didn't take him long to realize the foundations of the Canada Infrastructure Bank (CIB) are all wrong and he wouldn't be able to change that."

According to my friend, the CIB was incorrectly trying to be a private equity firm and should have instead been modeled on the European Infrastructure Bank (EIB). "The EIB is the gold standard and the CIB lags far behind."

My friend did say "the CIB is starting to hire people with revenue risk transactions experience" but he lamented "there's no way it will fulfill its mandate to invest $35 billion in an infrastructure platform because there's no pipeline and no interest from private sector investors."

We both agree the federal government needs to sell off chunks of their airport stakes and that the Montreal airport is grossly mismanaged but there are powerful vested interests which are blocking many infrastructure deals in this country, which is another reason why there aren't enough brownfield projects for sale (if Canadians only knew the truth, they'd be disgusted).

Maybe with Michael Sabia now controlling Finance Canada, this will change as he will be negotiating and holding high level discussions with other deputy ministers from key departments.

Maybe but it won't be easy. Still, Sabia isn't the patient type, he will demand swift responses as he weighs the best post-pandemic recovery policies (he should talk to my friend who he knows).

Lastly, following my comment last week on how CDPQ's helmsman is navigating the storm, I received an email on how I was too critical and too tough on Daniel Fournier, the former CEO of Ivanhoé Cambridge.

It's always the same guy who sends me these emails stating he once worked with him and that Fournier did a lot to revamp the Caisse's massive real estate portfolio, shifting it more into logistics and internationally.

No doubt, Daniel Fournier did a lot, he was much better than his predecessor, but as I told this person, he could have done a lot more, and that's why I was critical.

Fournier and Sabia made millions during their tenure at CDPQ and they were both lucky they left before the pandemic hit.

But I'm not going to lie, the pandemic is a bit of a blessing for Nathalie Palladitcheff, the current CEO of Ivanhoé Cambridge, because they can aggressively write down non-performing retail assets and blame the pandemic (everyone is going to do the same thing).

I'm certain Fournier would have done the exact same thing if he was still at the helm of Ivanhoé Cambridge.

Come to think of it, maybe Charles Emond, not Michael Sabia, will turn out to be the luckiest CEO ever of CDPQ (doubt it but with central banks backstopping madness, you never know). 

Alright, that wraps it up for me, I wish both Macky Tall and Michael Sabia much success in their respective new roles, if they or anyone else need to reach me, just email me at LKolivakis@gmail.com.

Below, an older clip featuring Michael Sabia's mentor. Paul Tellier, former President and CEO of CN Rail, hand-picked Sabia to help him launch CN Rail in what was then Canada's largest initial public offering. He discussed his track record in government, in Corporate Canada, and with the Caisse de Depot. 

Sabia did great things at the Caisse but he was far from perfect. I'm sure Charles Emond will take it to another level, continuing in the same direction on many fronts, but forging new directions too.

Each year, the McGill International Portfolio Challenge (MIPC) tackles a socio-economic issue plaguing our modern economies with an investment question. This year’s question was centered around whether it was possible to design innovative portfolio solutions to address the rise of social inequalities and protectionist tendencies in most developed economies. The focus was on Brexit, and on the launch of a new British sovereign wealth fund: BNSF.

Over the last few years, social inequalities and protectionism have become more widespread. Indeed, across countries, there has not been a uniform convergence in quality of life and income. Within OECD countries specifically, the income ratios between the richest and poorest 10% are up seven times compared to 25 years ago. The UK has one of the highest Gini Coefficient around the world. Additionally, protectionism is on the rise again. With the US’s withdrawal of the TTP and UK’s Brexit, the public opinion is shifting as more concerns are being raised about the consequences of globalization and free trade, and are being fueled by greater inter- and intra- country social-economic inequalities. In light of these changes, financial leaders around the world have started to examine ways to address these challenges, and MIPC 2020 gave them an opportunity to discuss better, more well-rounded strategies that create durable and tangible change in collaboration with the academic community.

This year’s case focused on devising an optimal investment strategy and asset allocation framework for a fictional British National Strategic Fund (BNSF) to best serve the UK’s economic interests following its withdrawal from the EU. BNSF is a brand new sovereign wealth fund with £50 billion of AUM and a complex triple mandate: (1) promote economic independence, (2) promote the long-term well-being of the UK population, and (3) maximize risk-adjusted returns.

This Fall, 93 university teams from 18 countries around the world took up this challenge and designed a long-term investment strategy for BNSF that successfully integrates impact. Many came back with clever ideas.

Key takeaways

This year’s edition saw the highest level of quality in proposals in the challenge’s history. Two proposals stood out to the panel of judges: one from Nanyang Technological University in Singapore, and another from Bocconi University in Italy. Here are four takeaways from these top proposals, which could ultimately serve as blueprints that guide the launch of a future British SWF.

First, the winning teams took a top-down approach to formulate and communicate their strategy. They started with an assessment of the UK’s social and economic context, the views of relevant stakeholders, and the overlap between the different objectives. From this, they derived holistic orientations and concrete decision metrics. This top-down approach allowed the teams to make integrated asset allocation decisions that tackle all pillars of the Triple-Mandate at once (i.e. win-win-wins). Moreover, the top-down approach gave the teams a tangible method to track the impact of their proposals across all dimensions beyond just a high Sharpe ratio. Examples of additional decision metrics included gross value added in the UK economy and net carbon emissions by BNSF’s portfolio companies. Having a clearly defined set of objectives provides BNSF with concrete targets to hit.

Another takeaway from the winning proposals was their large allocation to infrastructure projects targeted in under-resourced areas in the UK and in renewable energy (e.g. windfarms). These investments naturally satisfy BNSF’s triple mandate: they generate profitable and predictable streams of income, alleviate regional inequalities, and build sustainable energy sources inside the UK. Over the long-term, such investments can therefore provide a strong foundation for the UK’s future economy.

The third takeaway was the importance of investing in local SMEs. With their Brexit scenario analyses in hand, the winning teams noted that the UK’s SMEs, which represent the backbone of the British domestic economy and employment, would be hit hard by cuts in funding, the loss of EU workers, and a shrinking market. Increasing business and financing support to local SMEs was therefore a key component of BNSF’s investment strategy. Special attention was given to SMEs located in traditionally underfunded regions. Frameworks were designed to bring the right partners on board and give incentives for empowering underprivileged or underrepresented groups. The teams created a holistic SME investment strategy that aims to future-proof the UK’s industries, create national champions, and alleviate socio-economic issues.

The fourth takeaway had to do with the timing of BNSF’s investments. The bulk of the allocation for the early phases was directed at stabilizing the economy in a post-Brexit context, that is even more challenging given the COVID-19 pandemic. Sectors and regions most vulnerable to hard-Brexit scenarios were given priority. Later phases were structured to tackle structural unemployment and inequalities. These investments included projects in infrastructure and smart manufacturing plants. Final phases were focused on financing high-potential projects geared towards renewable energy and the digital economy. This design choice of changing priorities over time allows BNSF to better target all facets of the triple-mandate while focusing on a narrow and feasible set of projects at each phase.

This year’s virtual challenge

As in past editions, MIPC 2020 has been rich in experiences and lessons. Actionable solutions to a complex and critical issue were provided and gave all those involved a much better understanding of what it takes to successfully integrate impact into a large institutional portfolio.

An additional lesson from this year’s Challenge is that a virtual format brings plenty of new opportunities. In the past, the event week-end used to take place in Montreal. However, with COVID-19, the organizing team redesigned MIPC 2020 to take full advantage of the virtual format. Many new components, such as a new mentorship program and a five-day speaker series, were added. The virtual format made the Challenge more accessible to student teams outside of Canada, and a record-breaking number of teams participated (read more about MIPC’s efforts on inclusion and accessibility here).

Guidance from the Canadian pension industry

MIPC wouldn’t be what it is today without the involvement and expertise of the Canadian pension industry. Although MIPC partners with sponsors from a variety of industries that operate globally, the Canadian pension industry has been one of MIPC’s greatest contributors. Pension funds such as Ontario Teachers (OTPP), La Caisse de Dépôt et de Placement du Québec (CDPQ), CPP Investments, and PSP Investments have sponsored many cash prizes, actively participated in recruitment, and provided panels of remarkable executives for mentoring, judging and knowledge-sharing. The Canadian pension model, with a combination of independent governance, professional in-house management, scale, and extensive geographic and asset-class diversification, ranks first amongst global peers in asset performance and liability risk hedging. Hence, given the complexity of this year’s case and the brand new design of a sovereign wealth fund, the expertise and insight of Canadian pension fund leaders was much welcome.

What is next?

Digital and interactive versions of MIPC cases will soon be made available to the public. Past cases include the (1) the rescue of an underfunded Canadian corporate plan, (2) the severe underfunding of large U.S. public pension plans, (3) the design of a long-term environmentally sustainable investment strategy for a large Canadian asset manager, and (4) most recently, the incorporation of impact into the design of a brand new UK sovereign wealth fund.

In early 2021, MIPC will start to plan its fifth edition of MIPC which will take place in the Fall. What should the next Grand Challenge be?

I want to first thank Tania Kuoh, Co-Executive Director of the McGill International Portfolio Challenge (MIPC), for sending me this comment.

A few weeks ago, I had a Zoom web conference call with Tania and Sebastien Betermier, an Associate Professor of Finance at the Desautels Faculty of Management at McGill University who devised the MIPC, oversees it and guides the students.

Sebastien teaches a course on pensions and does ongoing research on pensions.

He has written a great paper on the Canadian pension fund model with Alexander Beath, Chris Flynn and Quentin Spehner of CEM Benchmarking,  

Together, the authors of this paper understand why Canadian pension funds perform better than most other pensions and registered savings plans but they too wonder:

“The years ahead will put the Canadian model to the test, as the severe impact of COVID-19 on commercial real estate, equities, and corporate bonds will undeniably hurt the funds’ assets in the short-run,” said the paper. “How resilient is the Canadian model to a pandemic? Will two-pronged strategies that increase asset performance and hedge against liability risks change in the post-pandemic world? We leave these questions for future research.”

Part of the answer to this question can be found in the Total Fund Management series Mihail Garchev and I have been discussing over the last few weeks (see our latest Part 6 on TFM capability here).

Anyway, back to the MIPC and the importance of impact. For those of you who are not aware, the MIPC is the pioneer of case competitions that target pensions, innovative portfolio design, and institutional asset management:

In 2015, a small group of McGill students had a compelling idea — bring together the world’s brightest students to Montreal to help solve some of the largest, most complex societal issues in the lens of long-term investment. 

Now on its 4th edition, the McGill International Portfolio Challenge bridges the disconnect between academia and the finance industry through our innovative cases which tackle key issues that institutional investors play a critical role in. We bring together hundreds of professional investors, actuaries, and students from a diverse set of backgrounds in order to solve these complex issues.

Normally, top teams come to Montreal to pitch their proposals in front of leading executives from many of the largest buy-side finance firms in the world. Exceptionally this year, teams will pitch virtually due to COVID-19. These judges come not only to determine who will win our challenge, but also to take inspiration from students’ ideas into their daily work as well as hire some of the world’s top student talent. The MIPC is an exceptional platform to apply classroom knowledge to a complex, multi-faceted, real-world case.

We award C$50,000 in cash prizes to our winning teams, a figure that makes us one of the most lucrative university competitions in the world. 

I had a chance to view this year's competition and thought all the teams did an outstanding job. 

For those of you who missed it, Ashley Rabinovitch of the McGill Reporter reports, Brexit, equality and COVID-19: Finance students tackle topical case study:

When a class of pension investment students at the Desautels Faculty of Management created the case study for the 2020 McGill International Portfolio Challenge (MIPC), they chose to focus on themes of social inequality and protectionism. At the time, they had no way of knowing that COVID-19 was just around the corner. “The topics of inequalities and protectionism are always relevant, but this year has made it abundantly clear that there are new dimensions to address,” said Tania Kuoh, who served as co-executive director of MIPC 2020 alongside Darius Kuddo, a fellow BCom student.

Rising to the challenge of the moment

Devised by Sebastien Betermier, an associate professor of Finance, the MIPC leverages the talents of student teams from around the world to develop strategic solutions for institutional funds. A powerhouse roster of executives – including representatives from the Canadian pension funds Caisse de dépôt et placement du Québec, CN Investment Division, CPP Investments, OTPP, and PSP Investments – judges 25 semi-finalists and five finalists vying for more than $50,000 in prize money.

Every year, the MIPC presents a complex portfolio construction problem that immerses students in an emerging facet of impact investing. Last year’s competition illuminated the complexity of investing in more environmentally sustainable sources of energy. This year presented a fictitious sovereign wealth fund in the UK, the British National Strategic Fund, and asked students to develop an investment strategy and asset allocation framework in the context of the country’s withdrawal from the EU.

The case study featured a unique triple mandate to make the UK more economically independent and equal while generating risk-adjusted returns over the long-term. “We have actually learned of ongoing discussion to launch a real new sovereign wealth fund in the UK that is similar to the BNSF,” shared Betermier. “Now we have a golden opportunity to shape the debate in a time that is especially difficult because of the COVID-19 crisis.”

Omer Juma, a project manager at the Marcel Desautels Institute for Integrated Management, planned the MIPC alongside Kuddo, Kuoh, and their team of BCom students. Juma says this year’s case competition drew record levels of participation because of, not in spite of, the ongoing challenges of COVID-19 and Brexit. “As the COVID-19 pandemic exacerbates existing social inequalities, the topic is already on people’s minds,” he reflected. “Given the added complexity of Brexit, questions of protectionism were also especially timely this year. The themes were a major sell for our participants.”

Going virtual

Instead of postponing the competition, the organizers of the MIPC decided to run the event virtually for the first time. “After hearing from returning universities and sponsors about their goals for the event, we went into design-thinking mode and began to envision unique ways we could leverage technology to maintain the level of interaction our participants had come to expect,” said Juma.

By all accounts, the virtual component of this year’s MIPC went off without a hitch. “The MIPC student team put in an enormous effort to redesign the change in a virtual setting,” Betermier affirmed. “Their hard work paid off.” The organizers of the MIPC went beyond the task of translating presentations to a virtual format as they implemented a new mentorship program, created new avenues for recruitment for both MIPC and McGill students, and organized a five-day speaker series.

One of the speaker series events featured a panel on diversity and inclusion in the world of finance. “Our team has worked hard to make the MIPC more diverse, particularly in terms of gender balance and geography,” said Betermier. “We are still receiving data on the student teams, but we have already noticed an increase in female participation – from 31 to 42 percent – and a greater proportion of teams from developing countries.”

According to Tanya Kuoh, the theme of this year’s case added fresh urgency to the need for diversity in a competition that had previously only included participants who could shoulder the cost of traveling to Montreal for the semifinal and final rounds of judging. “The case itself pushed us to address the inequalities perpetuated by our challenge, and we made conscious efforts to make it more accessible to students,” she shared. “Ultimately, having greater diversity within the challenge created richer discussions, which made for a more impactful experience.”

Regardless of whether the MIPC returns to an in-person format next year, its organizers predict that some virtual elements will remain in place. “A virtual format allowed us to be able to record and publish a lot of the high-quality content we generated, not only to benefit participants in different time zones, but also to expand the reach and the impact of the challenge globally,” reflected Darius Kuddo.

Taking home the prize

Five teams competed in the November 6 finals. In the end, two teams emerged victorious: a team from Nanyang Technological University in Singapore and a solo entry from Boccoli University in Italy. “Both winners created a top-down structure for how to think about the triple impact requirement that was well-integrated and easy to understand,” revealed Betermier. The two winners shared the $30,000 top prize, while another $20,000 went to reward the runner-up proposals, best speakers, and five other team proposals that distinguished themselves in a particular area, including exceptional quantitative analysis, storytelling, and diverse perspectives.

“Thanks to our dedicated student leaders, sponsors, and participants, the MIPC now has a four-year track record of mobilizing student talent and leadership on complex societal issues,” concluded Betermier. “As the COVID-19 crisis continues to make these issues even more complex, we are looking forward to seeing the ways in which our students’ efforts inform the larger conversation.”

I commend the organizers of this year's event, they really pulled through despite the challenges to deliver a great event.

As I end this comment, I can't help thinking back to my McGill days where I majored in Economics, minored in Mathematics and was taking pre-med courses (organic chemistry, physiology and biochemistry) as electives as well as courses in political philosophy with Charles (Chuck) Taylor, Sam Noumoff, James Tully, and John Shingler.

I was in way over my head but I loved it, soaking up knowledge and I'm not going to lie, my favorite courses were taught by Chuck Taylor, Tom Naylor, Sam Noumoff, Allan Fenichel and Robin Rowley.

Basically, I loved professors who challenged me and they all made me think deeply about distributive justice, comparative economic systems, money laundering and ecological economics, and the history of economic thought and moral and political philosophy.

Why am I bringing this up? Because these days, I'm very reflective about capitalism and where we are heading.

David Scudellari, Senior Vice President and Global Head of Credit and Private Equity Investments at PSP Investments recently posted a wonderful opinion piece by Pope Francis on the health crisis where he explains how in order to come out of this pandemic better than we went in, we must let ourselves be touched by others’ pain.

That comment should be read by all but I'm afraid the world is facing massive economic challenges and chief among them is how will policymakers adopt policies which favor a more inclusive post-pandemic recovery.

In my last comment, I went over how Prime Minister Trudeau just named Michael Sabia as the next deputy minister of Finance Canada and why this is great news.

Some people emailed me after I posted it wondering why Michael is accepting lower pay to do this job, answering to politicians. 

The answer is he's not doing it for the money, he's doing it out of a deep sense of public service. 

And he won't be taking marching orders from any politician, he will be advising them on how to come up with the best post-recovery policies.

These are monumental challenges, especially in a post-COVID world where rising inequality and climate change loom large.

One thing is for sure, I agree with TIAA CEO Roger Ferguson, capitalism must become much more inclusive if we are to address enduring issues like climate change and wealth inequality.

What role will global pensions and global asset managers play in this? I have a few ideas and I'm pretty certain Michael Sabia has some too.

But don't kid yourselves, the pandemic and the forceful monetary and fiscal policy responses have made a terrible inequality situation much worse and it will take decades and really innovative policies, including tax policies, to address this and create more inclusive growth.

Pensions can only do so much but they can play a critical role in shaping a better world.

I'll end it on that optimistic note because I feel the cynical Greek in me wants to end it with a pack of cynical remarks and I won't let that happen.

Below, the fourth edition of the McGill International Portfolio Challenge (MIPC) focuses on how large institutional asset managers can address rising protectionism and social inequalities through innovative portfolio strategies. MIPC 2020 case writers Alex Fonseca and Mandy Wang introduce this year's case which focuses on a fictional British sovereign wealth fund set up in the midst of Brexit and the COVID-19 pandemic. The fund has a unique triple mandate to support British economic independence and alleviate social inequalities while simultaneously achieving required returns.

I also embedded the two winning proposals for the 2020 event (thank you Sebastien for sending me links).

Third, I embedded the Awards Ceremony of the MIPC 2020 capping off two months of hard work by participating teams by awarding C$50,000 in cash prizes to the winning teams.

Stephen McLennan, Senior Managing Director, Total Fund Management at OTPP made me chuckle when he brought up his old econometrics days at McGill. I totally concur!

Both Stephen and Scott Lawrence, Managing Director and Head of Infrastructure at CPP Investments provided great food for thought in the second clip below so take the time to watch it.

Lastly, Mathieu St-Jean sent me a talk Nick Shaxson gave on the Finance Curse. I haven't seen it yet because he sent it to me right after I posted this comment but embedded it here so everyone can watch it.

Canada Pension Plan Investment Board (CPP Investments) has established a new, U.K.-based platform – Renewable Power Capital Limited (RPC). The platform is backed by CPP Investments’ multi-billion Power & Renewables investment strategy and will invest in solar, onshore wind and battery storage, among other technologies, across Europe. The business will be a majority-owned, but independently operated portfolio company.

RPC is headed up by Bob Psaradellis as CEO, formerly of GE Energy Financial Services, where he successfully closed equity investments in energy assets with over €5 billion in enterprise value, and raised over $14 billion in third-party equity and debt for GE’s power, renewables, oil & gas, aviation and healthcare projects globally.

The business is chaired by Shaun Kingsbury CBE, formerly Chief Executive of the UK Green Investment Bank, which he led from its formation with backing from the UK Government to become the largest renewable energy investor in the UK and ultimately on to a successful privatization in 2017.

Bruce Hogg, Managing Director, Head of Power & Renewables, CPP Investments, said “The establishment of RPC brings together our long-term, flexible capital and a management team with a depth of expertise and sophisticated understanding of the European renewable energy market. The business is well-positioned to create value through enhancing routes to market, driving more efficient commercialization strategies and making improvements to assets’ capital structures as many European renewables markets transition towards a subsidy-free regime.”

RPC will seek to enable the energy transition through a patient, long-term investment strategy underpinned by an innovative approach to managing development and merchant risk and the development of holistic capabilities to create long-term value through owning and operating renewable energy assets.

The management team includes Mark Hanson as General Counsel & Chief Operating Officer, Mariano Berges as Chief Commercial Officer, Steve Hunter as Director of Power Markets and Daniel Szentirmai as Principal.

RPC will build a scalable and diversified pan-European platform, initially targeting development, ready-to-build, and operating assets. RPC will have capabilities across different power markets, and across the value chain from development, through construction and into operations.

Bob Psaradellis, CEO, Renewable Power Capital, said “Our new platform is open to investments, initially in the Nordics and Spain, and expanding to other European jurisdictions thereafter. Drawing on our deep expertise in the sector, we can work together in partnership with developers, wind and solar equipment manufacturers, construction companies, and investment partners as the market continues to mature and addresses long-term structural change. We have a well-developed pipeline of opportunities and expect to make our first investment in early 2021.”

The platform will have access to flexible capital from CPP Investments allowing it to structure investments that recognise the changing market dynamics in Europe and range of risk-adjusted returns available.

CPP Investments has made approximately C$9 billion of equity commitments to renewable energy globally as of September 30^th, 2020, with investments in development and operational assets across onshore wind, offshore wind, solar, hydro and associated storage and distribution. The renewable energy investment strategy has approximately 4.5 GW of operating assets in Brazil, Canada, Germany, Japan and the USA, with investment professionals in Hong Kong, London, Mumbai, New York and Toronto.

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 September 30, 2020, the Fund totalled C$456.7 billion.
For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

About Renewable Power Capital

Renewable Power Capital is a pan-European renewable energy investment platform established in 2020, backed by CPP Investments. Renewable Power Capital is registered in the United Kingdom, with headquarters in London. We invest in the development, construction, and long-term ownership of solar, onshore wind and battery storage projects, enabling the energy transition and driving stable long-term, risk-adjusted returns. Our flexible mandate allows us to structure investments that recognise the changing market dynamics in Europe and to develop innovate solutions for managing development, construction, and merchant investments.
For more information, please visit www.renewablepowercapital.com

Another fantastic deal for CPP Investments where it's providing capital to establish a first-class European renewable energy platform that will grow its renewable energy investments in that region.

And when I say first-class, I mean it. Bob Psaradellis, CEO of Renewable Power Capital was formerly of GE Energy Financial Services, where he successfully closed equity investments in energy assets with over €5 billion in enterprise value, and raised over $14 billion in third-party equity and debt for GE’s power, renewables, oil & gas, aviation and healthcare projects globally.

The business is chaired by Shaun Kingsbury CBE, formerly Chief Executive of the UK Green Investment Bank, which he led from its formation with backing from the UK Government to become the largest renewable energy investor in the UK and ultimately on to a successful privatization in 2017.

In fact, the UK Green Investment Bank (now the Green Investment Group) was a non-departmental public body of the UK's Department for Business, Energy and Industrial Strategy (BEIS), but is now an independent organization owned by Macquarie Group Limited. 

Both Mr. Psaradellis and Mr. Kingsbury have extensive experience in financial renewable energy deals and the entire senior management team at Renewable Power Capital is extremely competent and will work hard to expand CPP Investments' renewable energy portfolio in Europe.

As their website states:

Renewable Power Capital is a pan-European renewable energy investment platform established in 2020, backed by CPP Investments. Renewable Power Capital is registered in England and Wales, with headquarters in London. We invest in the development, construction and long-term ownership of onshore wind and solar projects, enabling energy transition and driving stable long-term, risk-adjusted returns. Our flexible mandate allows us to structure investments that recognise the changing market dynamics in Europe and to develop innovative solutions for managing development, construction and merchant investments.  

Renewable Power Capital is led by a seasoned and established team of energy investment professionals with deep renewable power, technical and operational expertise and a strong common purpose. We are dedicated to the renewable energy sector, with a truly long-term mind set, creating value over decades rather than months. We are committed to industry leading practices and standards through all our operations, with a diligent focus on health, safety and environmental management.

Renewable Power Capital is focused on building strong, lasting partnerships centred on trust and integrity in alignment with the values of our investor and our global network of CPP Investments’ portfolio companies. Renewable Power Capital aims to pioneer the European renewables sector, accelerating the already rapid growth and playing a key role in making the energy transition a reality.

You can find out more about Renewable Power Capital by following this link to a recent interview with Bob Psaradellis* (Renewable Power Capital, President and CEO).

What We Do

Renewable Power Capital invests in, develops and manages European renewable energy projects, specialising in onshore wind, solar and battery storage technology.  Initially our primary focus will be on the Nordic and Spanish markets with a vision to expand into other key growth regions across Europe as we scale.

Renewable Power Capital provides management services to our portfolio of project SPVs using a team of experienced professionals and technical experts. We adopt a long-term asset ownership strategy with a primary objective to generate stable long-term, risk-adjusted returns for our shareholders.

CPP Investments isn't the only one expanding its renewable energy operations in Europe.

Recall, in mid October, I discussed how CDPQ expanded into renewable energy infrastructure in Spain with the acquisition of a 216-MWp solar portfolio from Spanish firm Q-Energy.

As I stated then, CDPQ is building out its renewables platform in Spain, a country that is taking sustainable energy to the next level. This is a long-term platform, one that will provide great cash flows over many years.

With the launch of Renewable Power Capital, which is a wholly owned subsidiary of CPP Investments, Canada's largest pension fund now has a dedicated platform to expand its European renewable energy investments, focusing first in Spain and Nordic market but with a vision to expand in other key growth regions in Europe.

Bruce Hogg, Managing Director, Head of Power & Renewables, CPP Investments, said it best: “The establishment of RPC brings together our long-term, flexible capital and a management team with a depth of expertise and sophisticated understanding of the European renewable energy market. The business is well-positioned to create value through enhancing routes to market, driving more efficient commercialization strategies and making improvements to assets’ capital structures as many European renewables markets transition towards a subsidy-free regime.”

Every major pension fund in the world wants to be part of the transition to a net zero economy, and investing in renewable energy will provide them with steady and attractive yields over the long run. 

Having a dedicated platform company like RPC will allow CPP Investments to be part of this transition to a net zero economy over the long run, and it will pay nice dividends to the 22 million+ members of the Canada Pension Plan.

In related news, CDPQ announced a $50 million private placement to help Xebec Adsorption Inc. (TSXV: XBC) (Xebec), a global provider of clean energy solutions, in its bid to acquire Green Vision Holding B.V., the parent company of HyGear Technology and Services B.V. (“HyGear”) in the Netherlands for consideration of €82.0 million (approximately $127.3 million). Details of this deal can be viewed here.

Also, Ontario Teachers'-backed Sidewalk Infrastructure Partners (SIP) announced it invested in another transformative clean energy project, this time with OhmConnect to make the power grid in California more efficient and reliable. Details of that deal are available here.

Interestingly, in mid November, Ontario Teachers' Finance Trust issued its first inaugural green bond:

Ontario Teachers’ Finance Trust (OTFT) announced today the issuance of a €750 million 10-year Green Bond. The issuance is fully, unconditionally and irrevocably guaranteed by Ontario Teachers' Pension Plan Board (Ontario Teachers’). The decision to issue a green bond builds on Ontario Teachers’ long history of responsible investing.

An amount equal to the net proceeds from this issuance will be allocated to assets that are environmentally and socially responsible and tackle critical issues like climate change. Eligible green assets satisfy one or more of the following:

•  Replace direct fossil-fuel use;
•  Facilitate low-carbon solutions;
•  Significantly reduce emissions;
•  Remove/store carbon;
•  Help adapt to climate change impacts; or
•  Help preserve or conserve scarce natural resources

“We believe a transition to a net zero economy is underway. This is expected to bring a host of attractive investments to Ontario Teachers’ that enable and support this transition, with the objective of earning strong risk-adjusted returns while also having a positive impact,” said Ziad Hindo, Chief Investment Officer at Ontario Teachers’.  “OTFT’s green bond issuance allows us to access capital to support the much-needed investments to transition towards a sustainable future.”

This marks OTFT’s inaugural green bond issued under the Ontario Teachers’ Green Bond Framework (Framework), which was prepared in accordance with the four core components of the International Capital Markets Association Green Bond Principles.

The Framework was reviewed by CICERO Shades of Green, a world leader in providing second opinions on the qualification of debt for Green Bond status. It received a “CICERO Dark Green” shading indicating strong alignment with a low-carbon climate resilient future as well as a governance score of “Excellent.”

As you can read, when it comes to a sustainable future, Canada's large pensions aren't just talking the talk, they're walking the walk. 

Like Ziad Hindo states, the transition to a net zero economy is underway, and Canada's big pensions plan on being part of this transition and making profits along the way.

Issuing green bonds helps raise funds to invest in renewable energy projects but I believe it's only a matter of time before OTPP follows CDPQ and CPP Investments and sets up its own renewable energy platform in Europe. Others will follow suit too.

Lastly, earlier this week, I posted this article on how Shell executives are quitting over discord over green push:

Royal Dutch Shell has been hit by the departure of several clean energy executives amid a split over how far and fast the oil giant should shift towards greener fuels.

The wave of resignations comes just weeks before Shell is set to announce its strategy for the energy transition. Some executives have pushed for a more aggressive shift from oil but top management is more inclined to stick closer to the company’s current path, according to four people familiar with the matter.

Marc van Gerven, who headed the solar, storage and on-shore wind businesses at Shell, Eric Bradley, who worked in Shell’s distributed energy division, and Katherine Dixon, a leader in its energy transition strategy team, have all left the company in recent weeks.

Dorine Bosman, Shell’s vice-president for offshore wind, is also due to leave the company. Several other top executives in the clean energy part of the business also plan to exit in the coming months, two of the people said.

You can read the rest of the article here. 

A couple of points. First, executive talent in clean energy quitting a major oil company like Shell is to be expected, there will be pushback fro those that want to stick to traditional energy.

This talent now represents opportunities for Canada's large pensions looking to expand their renewable energy platform, providing they can compensate them well, which they can.

But it also shows you how you can't force ESG standards on every company, especially oil giants, because maybe the pushback here is legitimate and in the best long term interests of investors, including large Canadian pensions.

I'm increasingly uncomfortable with environmental zealots raising ESG to a religious status and I know quite a few pension executives who privately agree with me (it's suicidal to criticize ESG publicly).

All these zealots who talk up "diversity and inclusion" should also respect diversity of views and respect diverging viewpoints which might be in the best interests of pension members over the long run. 

After I wrote my comment lambasting those who wrongly criticized CPP Investments' high-carbon approach, I was accused of being a "climate change denier" by internet trolls who work for environmental groups.

These idiots didn't even bother reading my comment and they know nothing about me.

I'm not a climate change denier, I'm a deep cynic, I knew the world was screwed when I took Tom Naylor's course on ecological economics at McGill University in the early 90s, and despite the Paris Accord (most people never bothered to read it) and many feel good accords, I still think the world is screwed when it comes to climate change.

What else? I welcome Canada's large pensions'push for more ESG disclosure but I truly believe more needs to be done, a lot more.

Importantly, all these renewable energy platforms investing in solar and wind farms are great but if Canada's large pensions really want to make a difference, and invest over the very long run, they'd partner up with large engineering companies and invest in nuclear power plants. 

Michael Sabia, are you paying attention? Now that you've been appointed the deputy minister of Finance Canada, let me put you in touch with skeptical Greek-Canadian engineers who will explain to you why nuclear is the way forward, not solar or wind farms!

Let me stop there before I get the ESG zealots after me, trolling me on LinkedIn and Twitter (sorry, no Instagram, Facebook or Tik Tok account, I hate that nonsense). 

For the rest of you, keep in mind, respecting diversity and inclusion means respecting differences in the way people act and think. Respect diverging viewpoints even if they go against everything you believe, be respectful and open-minded and listen carefully to all views, not just those in your head.

Remember, ESG is not a religion, it's another approach which complements the way long-term investors like pensions invest across public and private markets to ensure the long term sustainability of their investments.

Below, earlier today, the Canadian Club of Toronto held a free virtual event on ESG and Sustainable Investing featuirng Gerald Butts (Eurasia Group), Alison Loat (OPTrust), and Veronica Chau (BCG), and moderated by CPP Investments' former CEO and current Chair of AIMCo, Mark Wiseman.

Take the time to listen to this event, it was a very interesting and thought provoking discussion.

Also, in case you missed it, OPTrust President and CEO Peter Lindley’s keynote address - Where Risks Become Opportunities: OPTrust’s Evolution to Sustainable Investing– at the CAIP Virtual Conference series. Great stuff, heard this earlier, Peter explains it very well. Watch it here if it doesn't load below.

This is now our last week of the Introduction to Integrated Total Fund Management ("TFM") executive series. At the beginning of the series, we discussed some of the organizational and investment beliefs behind the increased interest in TFM and the corresponding organizational and investment strategies and objectives to support these beliefs.

With Episode 6 last week, we concluded the TFM implementation topic, which included a closer look at the TFM framework, process, and what is required to turn these into a capability. In the process, we also looked at 11 engaging case studies to illustrate examples of the use of TFM for real-life decision-making.

Typically, Episode 6 would have exhausted the topic of TFM as it covered all the functional aspects of TFM and how these functional aspects lead to the more efficient and effective management of the client portfolios.

However, throughout the series, we have been highlighting that TFM also has a structural role in enabling the next stage of development of the Canadian pension model. This is the focus of today's Episode 7.

More specifically, in Episode 7, we will discuss the evolution and critical success factors for the Canadian model. We will look past the usual discussion around the model, which looks at the macro factors, such as governance, talent and plan design, and we will try to look "under the hood"– understanding some misconceptions about the model, key characteristics and impacts, and the decisions that led to its success. And then we will ask the question, "Could there be a Minsky moment for it where stability breeds instability?"

While TFM could address many challenges to the current Canadian model, a critical challenge emerges, which relates to the embedded principal-agent conflict in the organizational design. This principal-agent conflict has been accelerating and manifests itself in the culture of the organizations. It is not surprising that culture has been a critical focus for all of the Canadian pension funds. And culture is directly and inversely related to size, scale, and complexity.

Unfortunately, the organization's culture is deeply embedded in the system and is therefore extremely difficult to change. An organization's culture comprises an interlocking set of goals, roles, processes, values, communications practices, attitudes and assumptions.

But if culture is so difficult to change and so embedded in the system, would it be possible to change the system and structure instead?

This discussion leads us to discuss organizational structure and design, specifically in the context of the Canadian pension model. What emerges from this discussion are four potential avenues to further advance the Canadian model to what we called its version 2.0.

In the end, the Canadian model version 2.0 endeavors to bring back the entrepreneurship and competitiveness, efficiency and effectiveness, innovation and creativity, and create a positive feedback loop back to the culture. So, this is at the. But in the beginning, it was Episode 1 and the in-depth discussion on the challenges the Canadian pension funds are currently facing.

In the beginning – A Flashback to Episode 1

We first discussed that the Canadian funds might be at a critical point of the organizational maturity because of size and scale, complexity, among other issues. The efficiency of the Canadian funds, the so touted "economies of scale," and by extension, the Canadian model as it is today, might be facing their biggest challenges.

From this perspective, TFM's goal is to restore the economies of scale by pursuing second-order efficiencies. We called these "economies of scope." These efficiencies occur because one uses an optimal top-down view to evaluate and adjust what may seem optimal on a standalone basis for the asset classes or operations. Some examples of such second-order efficiencies include reducing overlaps and associated costs and removing unintended bets and consequences, which is a hidden cost. Also, ensuring an optimal flow of capital and liquidity and that asset classes and Total Fund both function optimally and Total Fund is not subsidizing, in a way, the asset classes. Finally, help evolve other functions, such as risk, performance, reporting, and communication.

Client maturity and external environment are additional reasons for an increased Total Fund focus. In many cases, the pension plans' maturity leads to an increased sensitivity to negative outcomes due to the interaction of net cash outflows and market downturns. As such, it becomes increasingly important to manage the short and medium-term returns better and avoid adverse outcomes in a lower expected return environment going forward. Being efficient matters even more because cost becomes an increasing part of the overall return.

We have also witnessed an extraordinary environment of significant structural changes, disruption, pandemic, ESG, and various policies and regulations. Thus, selectivity would be an essential part of portfolio management. Just buying beta might not be enough anymore.

Finally, it might also be a question of survival for the pension model itself. With increased competition and the commoditization of strategies and low cost, sometimes even zero cost for some strategies, it becomes increasingly important for the pension fund managers to remain relevant. As much as clients might be captive, they could also influence organizational restructuring and investment strategy via the board of directors and even opt-out in some instances.

Another aspect is the ability of TFM is the need to manage complexity: the efficient flow of capital, managing beta, avoiding adverse outcomes, ensuring liquidity, and efficient implementation Our final point in Episode 1 was that ultimately, what matters are outcomes. For a typical pension plan, key outcomes are wealth to pay benefits, contribution rate stability, inflation adjustment, and liquidity. Outcomes could be achieved by designing a preferred mix based on asset classes and their long-term assumptions and hoping that these assumptions will realize. Or one should not be concerned about the asset mix as an essential belief, but rather, establish the required outcomes and tolerance levels around them and have this as an objective and as a policy portfolio. Then, continuously evaluate the best short and medium-term returns, their probability and confidence levels, and build a portfolio based on this. At any time, whatever the current asset mix is, it will have the highest probability of keeping outcomes intact.

Given the discussion above, we can outline the following key challenges:

• Size, scale and efficiency challenge the efficiency of the Canadian model 
• Client maturity challenge of increased sensitivity to adverse outcomes 
• External environment challenge of lower returns (less margin of error), disruption, headwinds and tailwinds of themes, and external competition (relevance of the Canadian model) 
• Portfolio effectiveness challenge due to the need to manage complexity: the efficient flow of capital, managing beta, avoiding adverse outcomes, ensuring liquidity, and efficient implementation 
• Increasing focus on outcomes instead of reliance on stable asset relationships
• Throughout the series, we have demonstrated that adopting TFM could address many of these challenges. We called this the functional role of TFM.

But could it be that in the ever-increasing size and complexity, TFM could only do so much? Beyond a certain point, these challenges may manifest themselves again and even reinforce their negative impact? For example, CPP Investments alone is projected to grow from $400 billion to $1 trillion, and similar growth for some of the other funds. Could size & complexity still overwhelm?

In most of the discussions so far, we highlighted the role of TFM to impact specific aspects of the Canadian model, mostly related to effective investment decision-making and resulting efficiencies (functional TFM). But is it possible that TFM could impact the entire organization, not just some parts of it (i.e., the structural role of TFM? And this includes not only investment management, but operations, structure, and importantly, culture.

Understanding the Canadian Model 1.0

There are many excellent papers on the Canadian model published over the last three years.

More recently, it is the excellent paper by Clive Lipshitz and Ingo Wolter titled "Public Pension Reform and the 14th Parallel: Lessons from Canada for the U.S.", as well as the World Bank paper titled "The Evolution of the Canadian Pension Model: Practical Lessons for Building World-Class Pension Organizations," as well as the numerous and again important papers by Keith Ambachtsheer and CEM Benchmarking.

My goal is not to repeat all the conclusions in these papers but look under the hood of the general conclusions. I will summarize the general conclusions nonetheless for completeness sake below:

• Joint sponsorship, unified legislation, arm's length, independent governance 
• Risk sharing and mandated funding of accumulated deficits 
• Size and scale, the certainty of assets, long horizon, in-house management, broad and global diversification, a significant focus on private assets, less regulatory constraints 
• Top talent, competitive compensation, professional management & boards 
• Ability to pool assets, strategic partnerships and knowledge capital 
• Conservative determination of pension funding formulas (discount rate). Contributions and benefit payments are evaluated holistically so that adjustment of one results in automatic adjustment of the other

These success factors were undoubtedly critical to success but did not tell the whole story. What is also important is to look "under the hood" and understand what happened at the organizational level, not the macro level. This exploration's insights could then point to what we could address in version 2.0 of the Canadian model. My insights are a combination of in-house specific knowledge as well as access to detailed peer data by CEM Benchmarking, in addition to several publications by CEM on the topic (see, for example, "The Canadian Pension Fund Model: A Quantitative Portrait," 2020). First, there is this common misconception that the Canadian model is more efficient. While it is true that size, up to a point, leads to economies of scale, the Canadian funds were only marginally more efficient than non-Canadian funds. The Canadian funds were, however, more effective. Efficiency is about doing things right — i.e., completing a task cheaper or faster. Effectiveness is about doing the right things — things that yield positive results. So, what were the right things that the Canadian funds do?

You can watch the presentation for more details, but the most important thing was to internalize the asset management in a nutshell. All the cost savings were then reinvested in the capability to manage real assets, build the foundation for active management, and support paying for talent and building risk management and systems (both crucial parts of the capability). Thus, costs were not necessarily reduced, but rather, reinvested in the capability. To gain a perspective, Canadian funds invested 4-5 times more in risk management and systems than non-Canadian funds.

But just having the capability is not enough; one needs to put this capability to work. It was critical to quickly deploy capital in the real assets in conjunction with more active management. This requires the ability to build relationships, networks, and "foot on the ground" via partnerships and platform investments and be nimble and have fast and best-in-class execution (legal, tax, etc.). This is where reinvesting in the capability was essential.

Other important decisions were to reduce the home bias (relocate to global and EM markets) and the efficient use of leverage (3-4 times more leverage than non-Canadian funds). Naturally, the above considerations led to an asset mix with fewer equities, more real assets, and fewer bonds (but leverage). Also, substantial changes were made within asset classes (e.g., equities due to the home-bias reduction and Real Estate and Infrastructure – see the presentation for more details).

When one looks at all these decisions together, the stars aligned for the Canadian funds, as all these decisions proved to be the right decisions. Contrary to the common perception, size and active management was not a significant driver of the risk-adjusted performance. What was crucial was the internalization, the reinvestment in capability, and deploying in real assets. 

But could it be that this stability may breed instability, this classical (now) Minsky moment, as illustrated in the figure below?

Translated to the Canadian pension fund context, you can think of this as the combination of accelerating organizational challenges (as discussed earlier) and the potential of market impacts, both structural and market shock-based. The more complex a system becomes, the more fragile it becomes. Part of this fragility is hidden and latent relationships that are not entirely understood (you need TFM for that!) and human behavior, which is as complex (and egocentric, no matter the parade of LinkedIn value statements) as it gets.

An excellent example of such a Minsky moment was the ABCP debacle for some of the Canadian pension funds during the financial crisis. The crisis was bad itself, but it had a severe impact because it was reinforced by human behavior.

This necessitates digging deeper into the impact of culture on the organizations, beyond just the façade of well-intended and well-crafted value statements and LinkedIn posts. After all, contrasting LinkedIn and Glassdoor is an excellent first glimpse at the difference between perception and reality. We explore the various facets of culture and its impact in detail in the presentation. We even go up to a point to talk about "ant wars." What is this? – more of it in the presentation.

Culture is too general of a term. What is important is how one decomposes the culture into underlying components. Significant in this respect is the principal-agent conflict. We discuss and illustrate this conflict in detail in the presentation. Still, the gist of it is related to the conflict between the agent's egocentric self-interest versus what is right to the principal (beneficiary).

While TFM could address many challenges to the current Canadian model, a critical challenge emerges, which relates to the embedded principal-agent conflict in the organizational design. This principal-agent conflict has been accelerating and manifests itself in the culture of the organizations. It is not surprising that culture has been a critical focus for all of the Canadian pension funds. And culture is directly and inversely related to size, scale, and complexity.

Unfortunately, the organization's culture is deeply embedded in the system and is therefore extremely difficult to change. An organization's culture comprises an interlocking set of goals, roles, processes, values, communications practices, attitudes and assumptions.

But if culture is so difficult to change and so embedded in the system, would it be possible to change the system and structure instead?

This discussion leads us to discuss organizational structure and design specifically in the context of the Canadian pension model and inspired by some early work by Deloitte on the "Adaptable Organization."

The figure below illustrates how we think organizations work versus how they work.

If that is the case, then it is essential to harness the power of cross-functionality and embed it in the pension organization design. It becomes even more apparent when we bring back one of the tenets of TFM about managing to outcomes, not necessarily asset classes. By extension, outcomes are the product of cross-asset, multi-strategy investment management and decision-making, which the core capability of TFM.

This means that the cross-functional organizational structure is the natural extension of TFM. This is how TFM now starts playing a functional role. In the presentation, we discuss many aspects and additional dynamics and structures related to this notion.

However, what is essential is that combining TFM and such a cross-functional organizational design could allow us to address many of the principal-agent conflicts as part of the overall cultural context. If organizations could become more entrepreneurial and more innovative and creative in a more competitive setting, they would become more efficient and effective. The structure itself would force out the negative sides of culture and the principal-agent conflict.

The final part of the presentation brings together all the insights on TFM, culture, and organizational development in a set of evolved Canadian pension models (the various version of the proverbial 2.0). We discuss these models in detail in the presentation, so next, we will provide just a brief illustration with the salient points.

Model 1 - The Horizontal Scorecard

Most organizations have some variation of "vertical" scorecards by departments and functions. But the notion of a cross-functional team and outcome-oriented portfolio management allows us to create a different organizational structure. For example, one could define strategic and pension sustainability goals as "outcomes" and then assign these "outcomes" to multi-disciplinary teams. The success of these teams relies on successfully delivering the outcomes. The CIO, via the TFM function (framework, process, capability), manage the "outcomes" toward the ultimate purpose. This links together the notion of outcomes, outcome-oriented portfolio management and the role of the TFM function.

 Model 2 - The Holding Company

Another possibility is to carve out functions (e.g., separate Infrastructure, RE, Public Markets, etc.). The pension fund itself becomes a holding company comprised of TPM and some support and administrative functions.

This is taking a step further what already exists in some funds where there are separate real estate and infrastructure companies (QuadReal, Ivanhoe- Cambridge, Cadillac-Fairview, Borealis, etc.). The CIO manages all required outcomes based on the "building blocks" from the Asset Co's. Asset Co's compete for capital ("internal market") but also External Co's. Operations are brought back to proximity within the Asset Co's, but there could be some shared services (e.g., custodian). Such a structure may bring less scrutiny/regulations, at least in the beginning. Innovation needs cooperation, not competition. Therefore, it should be a separate activity to support TFM, create new Asse Co's, or support Asset Co's needs (proximity). Finally, what is essential is also the ability to monetize the business model. The Asset Co's could manage 3rd party money (external Client Co's, which could be smaller or international pension funds, or any other capital). As such, fees flow back as income to pension beneficiaries.

Model 3 - The Baby Funds

The "Baby Funds" are carbon copies of the original fund. They are self-organizing and could choose any organizational model they prefer. Baby Funds compete for capital ("internal market") where the CIO allocates capital to the Baby Funds in a similar way one would allocate capital to external managers. The CIO still manages the outcomes using the TFM function. The Baby Funds could attract 3rd party money (e.g., issue MTN linked to performance). As such, we again could have the ability to monetize the business model. Asset Co's could manage 3rd party money (external clients could be smaller or international pension funds), and fees flow back as income to pension beneficiaries.

Model 4 - The Outcome Funds

Finally, the "Outcome Funds" are still self-regulating companies. Capital is captive and allocated as per the CIO and TFM function. There is no competition for capital, but there could be competing external "Outcome" managers. This structure brings clarity of mandate, explicit objectives, priorities, the measure of success. Efficiency captured explicitly via "cost per outcome." No "hiding" and "diluting" the results into vague and unclear statements and maybe convoluted measurement and reporting/communication. There is also the proximity of operations to investment. Because of the "outcome" separation, inefficiencies of the size and scale are addressed.

Lastly, it is useful to compare these variations of the Canadian Model 2.0 against some of the organization's desired effects, as depicted in the figure below.

These are just some initial thoughts to initiate a discussion, but TFM plays a central structural role in all the potential models.

Overall Episode 7 Takeaways:

• The Canadian model, as we know, it is only marginally efficient. Its strength is in the effectiveness – the ability to align many right decisions to achieve the right outcomes
• But the increasing challenges might put the test this past effectiveness and challenge the efficiency 
• The functional role of TFM (framework, process, capability) can address many of the challenges related to size, scale and efficiency, client maturity & external environment challenge, portfolio effectiveness and increasing focus on outcomes 
• But many of the challenges are related to structure and culture. They ultimately result in less efficiency (cost) and effectiveness (right outcomes). Culture might be challenging to change and might require rethinking the structure 
• Focusing on entrepreneurship & competitiveness and innovation & creativity ultimately leads to restoring the efficiency and effectiveness 
• The Canadian model's current strengths and benefits could be further extended by adopting structures that could significantly increase its future potential. TFM plays a critical role in this

This concludes our series. Thank you all for following Leo's blog over the last ten weeks and for all your support, comments, and insights!

***

Let me begin by thanking Mihail for another great comment, I personally think he saved the best for last.

Against my advice, he literally stayed up all night to complete everything, which is why he might sound a little tired in Episode 7 below, but it's still well worth listening to it.

Let me keep my comments brief.

Earlier this week, in a post featuring another guest comment from the team at the McGill International Portfolio Challenge (MPIC) on impact investing, I stated this:

[Sebastien Bertemier] has written a great paper on the Canadian pension fund model with Alexander Beath, Chris Flynn and Quentin Spehner of CEM Benchmarking,  

Together, the authors of this paper understand why Canadian pension funds perform better than most other pensions and registered savings plans but they too wonder:

“The years ahead will put the Canadian model to the test, as the severe impact of COVID-19 on commercial real estate, equities, and corporate bonds will undeniably hurt the funds’ assets in the short-run,” said the paper. “How resilient is the Canadian model to a pandemic? Will two-pronged strategies that increase asset performance and hedge against liability risks change in the post-pandemic world? We leave these questions for future research.”

Part of the answer to this question can be found in the Total Fund Management series Mihail Garchev and I have been discussing over the last few weeks.

In order for Canada's large pensions to thrive in a record low rate environment/ post-pandemic world, they really need to adopt a TFM approach to unleash the second order effects Mihail talks about above.

Importantly, and I believe this with every fiber of my being, the Canadian Model 1.0 is stale and obsolete, stick a fork in it, it's done!

What did you say Leo? Mr. Pension Pulse, have you lost your marbles?

Nope, I know exactly what I'm talking about. Yes, Canadian model 1.0 is a great success story but it can only take Canada's large pensions so far, and when everyone is doing the same thing, and complacency sets in, that's when the "Minsky moment" can creep in as stability breeds instability.

Mihail gave the example of ABCP. Funny enough, my first blog post years ago was on the ABCP's of pension governance, discussing among other things, bogus benchmarks.

I can sum up the ABCP scandal/ crisis at the Caisse in one sentence: too much power concentrated in the hands of too few doing extremely risky and dumb things using pensioners' money.

And it wasn't just ABCP. There was another senior portfolio manager at the Caisse back then (he's still working in the industry so I'll be kind and not mention his name), who was using the Caisse's balance sheet to do exotic long-term volatility swap trades. And he had full backing from the President who thought he was a "genius".

Genius, my ass! I arranged for a lunch with this person and a couple of former portfolio managers here in Montreal who allocate funds to sophisticated hedge funds. he was trying to raise money from them and when they heard his pitch and what he does, one turned to him and flatly stated: "Stick with the Caisse, nobody in their right mind would ever give you an allocation to do such a risky strategy."

Well those two Jewish allocators were smart as hell and they knew exactly what they were talking about because a few years later, this person's "sophisticated strategy" cost the Caisse and its depositors $1.2 billion, if not more.

Amazingly, and quite worryingly, nobody at the Caisse was allowed to question this person or his strategy and he hid everything from everyone, going as far as telling his back and middle office analysts bits and pieces so nobody understood what the hell he was doing.

It took a very experienced and senior portfolio manager and another senior portfolio analyst to deconstruct the "genius's" portfolio to figure out what a mess the Caisse was in.

Over at PSP, right after I warned them of the looming US housing market collapse and the insanity of CDO-squared and CDO-cubed issuance back in the fall of 2006, it didn't take long for another credit portfolio to blow up. That portfolio manager and his team were not evil geniuses, but they had no clue of the risks they were taking and it could have literally annihilated PSP in 2008 (it was that bad!).

Culture. Sometimes you have arrogant jerks with too much power, sometimes you have nice guys or gals doing silly things, taking excessive risks, trying to look "sophisticated" but in reality they expose a pension to huge losses.

Mihail was a bit too kind and politically correct in his comment above.

Let me be blunt: without the right people and culture at all levels, especially senior levels, the best TFM approach is totally useless. All it takes is one or two powerful jerks (or nice PMs with too much power) to destroy a pension.

If you're a CEO of a major Canadian pension and you have one or more bad senior managers, get rid of them, the cost of keeping these people in senior roles far outweigh the settlement packages you need to pay to get rid of them.

Toxic culture is the death knell of innovation and collaboration and it renders TFM obsolete.

I'll leave it at that because I can go on and on and on, and the hopelessly cynical Greek in me wants to jump out and spill more beans, but I won't allow it.

Let me end once again by thanking Mihail Garchev for a truly phenomenal series, it was a real pleasure working with him again and I hope he comes back with other material, like benchmarks and compensation at Canadian pensions (he implemented great stuff at BCI). 

Below, Episode 7 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 stuff, a lot of veteran, intermediate and novice pension managers can learn a lot from this series and we all owe a debt of gratitude to Mihail for delivering it to us.

The S&P 500 fell on Friday, wrapping up a losing week, as the outlook for additional fiscal stimulus remained uncertain.

The broader market index pulled back by 0.1% to close at 3,683.46, and the Nasdaq Composite dipped 0.2% to 12,377.87. The Dow Jones Industrial Average eked out a gain of 47.11 points, or 0.2%, to 30,046.37 as shares of Disney rallied.

Both the Dow and S&P 500 posted their first weekly declines in three weeks, losing 0.6% and 1%, respectively. The Nasdaq dropped 0.7% this week.

Friday’s moves came as negotiations over a coronavirus relief deal dragged on. Lawmakers seek to pass a bill before the end of 2020, but disagreements over state and local stimulus, unemployment assistance and stimulus checks still exist.

“Optimism surrounding a near-term fiscal stimulus deal are fading despite reports of a bipartisan deal, as the sides can agree on the size of a deal, but not the details,” wrote Mark Hackett, chief of investment research at Nationwide.

Democrats have also pushed back against the White House’s latest $916 billion aid offer, noting it doesn’t include any additional federal unemployment insurance money. The bill, however, was blessed by GOP congressional leaders.

The House and Senate passed a one-week federal spending extension to avoid a shutdown through Dec. 18 to buy more time to reach a stimulus agreement.

“The inability for Washington to enact more fiscal aid is a complete failure. We know where the differences lie,” wrote Gregory Faranello, head of U.S. rates trading at AmeriVet Securities. “Right now this is about cashflow and saving businesses and helping keep individuals afloat while we rollout the vaccine.”

Share of companies hardest hit by the pandemic recession fell on Friday. Carnival dropped 4.5%, United Airlines slipped 2.6%, and Gap lost 3.6%. Hyatt Hotels traded lower by about 1.4%.

Tesla shares, meanwhile, fell 2.7% after a surprise downgrade by Jefferies.

Without fresh stimulus, millions of Americans could lose unemployment benefits in the new year. Meanwhile, weekly jobless claims jumped last week to 853,000, the highest total since Sept. 19, as new lockdown restrictions weighed on businesses amid rising coronavirus cases.

Sentiment was downbeat on Friday even as a key Food and Drug Administration advisory panel recommended the approval of Pfizer and BioNTech’s coronavirus vaccine for emergency use. The recommendation marked the last step before the FDA gives the final approval to broadly distribute the first doses throughout the U.S.

Bucking the negative trend was Disney. On Thursday, the company said its Disney+ service has 86.8 million subscribers and expects have between 230 million to 260 million subscribers by 2024. The stock rose 13.6% on Friday.

Alright, it's Friday, there is a lot to cover on markets so let me get right to it.

First, fiscal stimulus, it's coming, we are approaching Christmas and mark my words, neither the Democrats nor the Republicans can afford not to pass something before Christmas.

And once the Biden administration settles in, expect another massive fiscal stimulus package in the first quarter of next year, especially if Democrats win the Senate runoff elections in Georgia in three weeks.

More fiscal stimulus will help push these markets higher because it will bolster value stocks (VTV) which have been making a nice comeback in the last few weeks as growth stocks (VUG) stagnate:

Of course, some hyper growth stocks have registered monster gains this year and it's only to be expected that large funds are booking some profits here and that analysts are flashing the yellow sign.

Earlier this week, J.P. Morgan analyst Sterling Auty said time has come to take profits in super-pricey software stocks like Zoom Video Communications (ZM), Okta (OKTA), and DocuSign (DOCU)—and to find bargains elsewhere:

In a 151-page report, Auty lays out a case for shifting strategies on the sector heading into a post-pandemic economic recovery in 2021. He suggests moving into cyclically sensitive software shares—those that do better when the economy is expanding—and out of the premium-priced stocks that have thrived in the Covid-19 era. He notes that J.P. Morgan economists see the economy starting to turn around in the second quarter.

“Last year at this time, we were saying that the economic outlook really hinged on the outcome of China trade negotiations and that we wanted to stay cautious on cyclical names,” he writes in this morning’s report. “That turned out beneficial because of Covid 19. Now we believe that the economic outlook hinges on Covid-19 vaccine efficacy and availability, but we are turning bullish on cyclically sensitive software.” 

Auty notes that the stocks he covers rallied on average 62% for the year through the end of November, versus a 12% gain for the S&P 500.

“It has been another tremendous year for software, as demand held strong throughout the pandemic and valuations expanded significantly with capital coming in from other sectors,” he writes. “Looking ahead, there is a scenario where improving economic expansion could motivate capital to rotate back out of software in favor of lower valuation cyclical segments that will benefit from economic improvement. Much of that will hinge on the success of vaccines to effectively open up the economy more broadly.”

Auty advises investors to snap up cyclically sensitive software stocks, and upgraded seven stocks on that basis, including Altair Engineering (ALTR), Autodesk (ADSK), Cadence Design Systems (CDNS), PTC (PTC), VeriSign (VRSN), Wix.com (WIX), and Intuit (INTU).

“The economic expansion is expected to be driven by the manufacturing sector, and that should favor the design software names in our coverage,” like Altair, Autodesk, Cadence and PTC, he says. “On the SMB front, we have already started to see increasing business starts that could continue into 2021 on the back of favorable interest rates and the potential for a more open economy post COVID-19,” and he sees that boosting stocks like VeriSign, Wix and Intuit.

His top two picks, meanwhile, are Varonis (VRNS), a data security and threat detection company, and RingCentral (RNG), which provides cloud-based unified communications services. “Both companies have the potential to show accelerating revenue growth, Varonis on the back of its subscription transition and healthy demand for data protection solutions and Ring from the increasing contribution of the partnership agreements signed over the last 12 to 15 months,” he writes. 

I don't know if Auty will turn out to be right but I respect an analyst who is able to come out and state that some of the stocks he covers have run up too much and that maybe investors should focus their attention elsewhere.

But he warns that his recommendations hinge on the success of vaccines to effectively open up the economy more broadly.

That remains to be seen but one thing is for sure, the dark winter is upon us, COVID cases and deaths are surging all over the world, and the US just suffered its worst week of cases, deaths and hospitalizations since the start of the pandemic. 

Still, this market doesn't care about COVID, it's not only turning the page, there are increasing signs of market manias developing out there.

This week, for example, food delivery startup DoorDash (DASH) raised its US initial public offering after boosting its price range on frenzied investor interest in technology stocks that have been boosted by the Covid-19 pandemic.

As you can see below, the stock IPOed at $90 Tuesday and settled the week at $175 a share:

The stock IPOed at $68 and was immediately snapped up, after an increase in price, finally settling the week at $139 but only after it topped $160 a share yesterday when it IPOed:

I'm not saying all stocks that OPOed recently are over-valued but most are and there are a few that I really like QuantumScape Corporation (QS), C3ai Inc (AI) and Certara (CERT) which IPOed on Friday:

What else? This week we saw insane speculation is microcap biotech stocks with low float.

I kept a snapshot of Greenwich LifeSciences (GLSI) on my desktop from Wednesday after the company announced a poster presentation of five year data for its GP2 Phase IIb clinical trial, showing 0% recurrence of breast cancer:

At one point, the stock was up 2,400% -- in one day!! -- before settling up 1,000% on Wednesday.

Of course, my antennas were up immediately, why didn't any of the top biotech funds or other top funds I track own any shares prior to this announcement?

Anyway, a lot of that speculative frenzy disappeared by Friday and I'm afraid fortunes were made but mostly lost here:

Are there great small biotechs? You bet, earlier this week, TG Therapeutics, Inc. (TGTX), announced positive topline results from two global, active-controlled, Phase 3 studies, called ULTIMATE I & II, evaluating ublituximab, the Company’s investigational novel, glycoengineered anti-CD20 monoclonal antibody, compared to teriflunomide in patients with relapsing forms of multiple sclerosis (RMS).

The results were fantastic and the stock took off, capping a great week:

But the difference here is  the top holders are Fidelity, RA Capital, Maverick Capital and other top funds and the science is unquestionable and led by top scientists in the field:

Lawrence Steinman, MD, Zimmermann Professor of Neurology & Neurological Sciences, and Pediatrics at Stanford University and Global Study Chair for the ULTIMATE I & II studies commented, “B-cell targeted therapy with anti-CD20 monoclonal antibodies has dramatically shifted the treatment paradigm for patients with MS and has shown to be very effective in reducing relapses in patients. I am pleased to see such positive results from this important trial exploring a one-hour infusion of ublituximab every six months and believe, if approved, the unique attributes of ublituximab, particularly that it has been glycoengineered for enhanced antibody dependent cellular cytotoxicity, may offer benefits to patients in the RMS treatment paradigm.” Dr. Steinman continued, “MS is a chronic demyelinating disease where having a variety of treatment options within the same class has shown to be important for patients. I look forward to the full data from the ULTIMATE studies to further understand the potential of ublituximab in MS.”

A biotech like this has a very strong future and might potentially be bought out by Biogen (BIIB) which is losing its reign as the leader for MS drugs.

Anyway, all the IPO and micro cap biotech frenzy this week got me to lash out on LinkedIn yesterday:

Forget the tech bubble of 1999. We are witnessing the biggest IPO bubble in history, giving new meaning to "extraordinary popular delusions and the madness of crowds." Yesterday, DoorDash (DASH) shot up in its IPO debut to ridiculous levels. 

Today, we are seeing more silliness in micro cap biotech stocks with low float surging on pure speculation (GLSI, SLS, IMMP), but check out the IPO of Airbnb (ABNB), totally ridiculous what's going on, and I might add totally predictable given the speculative mania engulfing these crazy markets. 

 A couple of weeks ago, I wrote that central banks are backstopping and encouraging this madness but I wonder if Mr. Powell will throw some cold water on this insanely speculative market next week. He won't raise rates but he might talk about irrational exuberance like Greenspan did in 1996. Of course, the quant funds will buy that dip hard too, just like they did back then...welcome to insanity!!

Even if Powell says something regarding speculative activity this week (doubt it), the Fed has already unleashed a liquidity tsunami and all that liquidity coupled with ultra low rates leads to massive speculation as funds borrow for nothing to speculate on growth stocks.

And my biggest fear is things are only starting to get nutty out there, we will see a lot more nonsense and incredible volatility in these markets before it all ends in tears, but for now, enjoy this nothing matters market and the mad dash for trash (as cash is literally trash, for now).

Alright, let me wrap it up there.Before I do, here are this week's top large and small cap top performing stocks (no, your eyes aren't deceiving you!):

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Below, 2020 has been a monster year for new public offerings. Plantir has gained 273% since going public, Snowflake is up 211% and Airbnb more than doubled in its debut Thursday. CNBC's Leslie Picker joins "Squawk Box" with more on the wild IPO market.

Also, Steve Cakebread, who served as a CFO at Salesforce, Yext and Pandora when those companies went public, and Chip Conley, former Airbnb head of global hospitality and strategy, joined "Squawk Box" on Friday to discuss what could be next for Airbnb and DoorDash after their big public debuts.

Third, listen to CNBC's Leslie Picker and Michael Santoli from 'The Exchange' discuss Airbnb which has started to trade priced at $146. Santoli said the hysteria were so bad, people mixed it up with another company with a similar ticker.

Fourth, "There's a lot of people talking about stocks now like you haven't seen," CNBC's Jim Cramer said Friday. "Then there are a lot of people who don't have jobs and they're not talking about stocks. It's that so-called 'K' recovery."

Lastly, Kynikos Founder & President Jim Chanos says people are doing really dumb things with their money, driving up share prices of companies based on narratives that are too good to be true. He also discusses his "painful" short in Tesla Inc. before the electric vehicle maker is added to the S&P 500, as well as his bet against IBM, which is his highest conviction short. He adds the Biden administration will not be anti-markets. Chanos speaks exclusively with Scarlet Fu on “Bloomberg Front Row.”

When the year began, no one could have foreseen that our lives would be disrupted by a global pandemic that would wreak havoc on our communities and force businesses to adapt and respond to a series of extraordinary challenges. Through it all, I’ve been impressed by the resilience and agility displayed by my colleagues at OMERS and by our portfolio management teams as we’ve navigated this crisis together.

Reflecting on the year, I’m particularly proud of the way our portfolio companies rose to the occasion with solutions to support our communities. For example, LifeLabs, the leading provider of community laboratory services in Canada, coordinated with government partners to add critical COVID-19 testing capacity. Bruce Power, one of the largest nuclear power plants in the world, produced isotopes to sterilize medical equipment and provided millions of pieces of personal protective equipment to frontline workers. Recently, Bruce Power launched the “Be a Light” campaign, committing $1 million to work with public health, county and municipal governments, chambers of commerce, hospitals, local MPs and MPPs and community organizations to redouble efforts to battle the pandemic. Those are just a few examples of the way our companies have demonstrated remarkable leadership throughout the crisis, and I couldn’t be prouder to partner alongside them. 

I’m also proud of our Americas infrastructure team who’ve done an incredible job adapting to working from home. The team has continued to support our portfolio companies while also working to identify and diligence new investment opportunities; they haven’t missed a beat. In the recent sale of our stake in the Detroit River Tunnel Partnership (DRTP), we were able to work seamlessly to execute the transaction in this challenging environment thanks to our strong preexisting partnership with Canadian Pacific (CPR). Over the course of our investment, we collaborated with CPR as long-term owners and developers to add value and ensure safe and reliable operations of a major international transportation link; I wish them continued success. 

The pandemic has showed us that strong, modernized infrastructure in the areas of transportation, health, telecommunications and energy, among others, is needed to support the well-being and safety of our communities. At the same time, COVID-19 has accelerated some trends we were already seeing within infrastructure: nowhere more so than in digital infrastructure. The crisis has accelerated the digitization of many businesses, services and traditionally in-person experiences, most notably in the workplace and education. The rise of remote work during the pandemic, and the likelihood for it to prevail post-crisis, will create substantial opportunities for infrastructure investors such as ourselves. As part of the shift online, data infrastructure has been, and will continue to be, an area of growth, and the strength and security of this infrastructure will be imperative to fueling economic growth in the post-COVID economy.

As the year comes to an end, I would like to reiterate my appreciation for our employees, portfolio company management teams and essential workers, many of whom are OMERS members, who have all done an incredible job navigating these unprecedented times. Thank you for everything that you do to support each other, our communities and the sustainability of our members’ pensions.

Philippe Busslinger, Senior Managing Director & Head of Europe at OMERS Infrastructure also provided a year in review on LinkedIn:

As I reflect on the events of this year, I’m incredibly proud of how the OMERS community globally came together to continue to deliver our pension promise to our 500,000 members, including active and retired teachers, school administrators, firefighters, policemen, and civil servants in Ontario. It has been humbling to see our team rise to the extraordinary challenges of 2020 to support each other, our members, our assets, and our communities.

As long-term custodians of critical infrastructure businesses, we have been supporting our twelve management teams across our pan-European portfolio as a priority. First and foremost, we have focused on ensuring that the companies could continue to provide their essential services in a safe manner for their customers and staff. Secondly, we had to ensure their balance sheet resilience given the increased volatility. Thirdly, we had to support them planning for a prolonged uncertainty.

As I look back at what we achieved, I am proud at how our portfolio companies rose to the challenge. How a company navigates a crisis depends on the quality of its board, governance, management team, culture and the resilience of its systems and processes. I saw management teams remain composed and focused, adapt swiftly to remote working and uncertainty, and multiply their engagement with customers and other stakeholders. Asset managers at OMERS employ a sparring partnership approach with our management teams and this trusted relationship leads - in my view - to better decision making in times of stress.

Beyond keeping their own businesses running, I am immensely proud of our portfolio companies’ front-line employees – many of whom were designated essential workers - continued to meet the needs of their communities during this crisis. London City Airport in the UK for example offered its airfield to support the transport of medical supplies and equipment to the Nightingale Hospital.

Our resilience this year is not only the fruit of our active asset management approach, but also of the diversified nature of our portfolio and its low correlation with short term demand cycles. This pandemic reinforces my conviction that there is no substitute for diversification and thoughtful portfolio construction.

With over two decades investing experience, OMERS is a pioneer in infrastructure. Today we are custodians of an equity portfolio in excess of C$20bn spread across more than 30 companies in 12 countries. Such a portfolio has been built as a bedrock for the pension plan and as such with a relatively low correlation to other asset classes. Transport infrastructure - which has been one of the most impacted segments this year - barely accounts for a quarter of our global exposure. In the last four years, we have been further future proofing the European portfolio by adding exposure to sectors such as water, rail and fibre. In 2020, we were fortunate enough to close the acquisition of Inexio & Deutsche Glassfaser in Germany and of Covage in France.

In addition to diversification, our portfolio gives us the flexibility to crystallise gains opportunistically without necessarily altering the risk profile of the portfolio. For example, our London team completed the sale of our smart metering business MapleCo during the pandemic, generating an additional positive contribution to the plan’s return in a challenging year.

Last but not least, our London based Infrastructure team has shown its true colours: remaining composed, focused, agile, collaborative and not letting the pressure take away its peculiar sense of humour despite the personal and professional challenges they and their families have been subject to. I have been impressed at how seamlessly the team moved into WFH mode; working tirelessly to identify risks and support our 12 management teams ensure business or financial resilience. I know that this effort has come at a great cost to people’s lifestyles and for that I am immensely grateful.

Despite 2020 being a challenging year for all of us, OMERS has remained resilient. Although this crisis is not over yet, I’m looking ahead to 2021 with confidence that the robustness of our portfolio, together with our differentiated investment and asset management approach, and the strength of our team will allow us to continue to deliver secure and sustainable returns for our members.

OMERS Infrastructure manages the infrastructure assets at OMERS. It's a powerhouse and has a very enviable portfolio of companies others can only dream of.

As you can see below and when you head over to its website, they own great assets all over the world:

Now, I'm not going to lie, I'm on record stating that OMERS, OTPP, AIMCo and the Kuwait Investment Authority went a little nuts four years ago when they won the takeover battle for London City Airport with an offer of about £2bn. 

Don't get me wrong, pandemic or no pandemic, it's a great asset but they bought it at nosebleed valuations.

Still, if they hold it long enough and realize on their value creation plan, they will make great returns on this investment. 

Why? Because as Victoria Moores of Aviation Week reports, London City Airport traffic is set to double in the 2030s:

Under a new long-term master plan, London City Airport (LCY) is expecting to handle 11 million passengers by the mid-to-late 2030s–more than double the 5.1 million that it handled in 2019.

“Our current planning permission allows us to accommodate up to 6.5 million passengers and 111,000 aircraft movements per year,” the airport said Dec. 4. “These annual limits are expected to be reached in the coming years.” 

The new strategy updates London City’s 2006 master plan, which originally predicted 5 million passengers by 2020, growing to 8 million by 2030. Back then, aircraft movements were expected to hit 171,000 by 2030.

“Having updated our forecasts as part of this master plan, we expect passenger demand to use London City Airport to increase to 11 million passengers annually, accommodated by around 151,000 air transport movements, including 5,000 business aircraft movements,” London City said. “This long-term forecast is likely to be realized by the mid-to-late 2030s and could see our share of expected passengers across the London airports increase from around 2.8% to around 4.3%, dependent on how capacity develops at these other airports over time.” 

Movements are now expected to rise more slowly than the 2006 plan predicted, reflecting trends toward larger average aircraft sizes and higher load factors. London City expects to hit the 6.5 million passenger limit before the movement cap.

London City believes it can support the forecast growth using its existing runway, without any changes to its operating hours or existing eight-hour night flight curfew. 

“We have not included proposals for a new runway, to extend the length of our existing runway or to significantly expand our existing site boundary,” the airport said. Instead, the airport is planning “modest, incremental changes” to the airfield, to pave the way for more new generation aircraft. 

The draft master plan was released in June 2019 and went through a 16-week consultation period. The final strategy was scheduled to be released in March 2020, however it was delayed to December 2020 because of the COVID-19 pandemic.

Under the original draft of the 2020 plan, London City was expecting to hit 11 million passengers and up to 151,000 movements by 2035. In light of COVID-19, the airport is now expecting to hit these figures in the mid-to-late 2030s.

“In the short term, it is clear that our focus has to be on recovering from the devastating impacts of COVID-19, supporting our communities and welcoming back passengers and airlines to London’s most central airport,” LCY CEO Robert Sinclair said. “As recent events have shown, it is not possible to be precise about future trends. However, we believe that the fundamentals underpinning future growth at London City Airport remain.”

During the height of the COVID-19 crisis, LCY temporarily closed. Several parts of the airport’s development program have already been completed, including eight new aircraft stands, a full-length parallel taxiway and new passenger facilities, but remaining plans have been put on hold.

“The new infrastructure will allow us to provide additional capacity when demand returns and provides a firm foundation for the future terminal extensions, now that the most complex infrastructure activities have been completed,” the airport said.

You can view London City Airport's master plan here.

Clearly, COVID-19 has dealt a devastating blow to airports around the world, especially in the UK, US and other countries where the pandemic has raged on.

It's the longer term effects that we still don't know. Will Zoom and other technologies mean a permanent reduction in business travel? If so, how does this impact airport traffic and revenue projections?

Nobody knows. Just like nobody knows how offices will be impacted longer term in a post-pandemic world.

Brookfield's CEO Bruce Flatt thinks the effects will be minimal, tech mogul turned philanthropist Bill Gates thinks there will be a permanent reduction in office demand.

Speaking of Bill Gates, he was on CNN Sunday stating lockdowns should carry on into 2022.

I sent that comment to a friend who didn't mince his words about Gates and other tech moguls making public proclamations on health policy:

Anyone who thinks in a purely Cartesian manner, like most people in tech, especially multi billionaires, are really completely useless in a pandemic. 

 

When I hear people say "it's about the science", I cringe, especially when it comes from politicians who have never seen the inside of a lab or been in an engineering environment. 

 

In addition to the science, this is about jobs and lives being destroyed. It's about economics, mental health, and corruption. It's about politics, about the Left using the pandemic to peddle their ideology which has never worked (and never will) and about the uber wealthy protecting and sometimes potentially increasing their wealth. 

 

So Bill should probably go back to coding in C++ and stop trying to pretend that he knows anything about pandemics because he doesn't. Cutting a big cheque to vaccinate children in Africa, although honourable, does not make you an expert in anything. A lockdown lasting until 2022 will render a large proportion of the population destitute so they may not die from the virus but from hunger ... great options BIll.

My friend added:

The politicians have a much larger obligation to the population than just deferring to public health. Public Health is important and can take priority over things, but only in the short term. They have no choice but to look at the larger picture. We need real leaders now. People who can advance multiple fronts in parallel, who can cut through the politics, and who don’t talk in platitudes.

Now, my friend may have been a tad harsh on Gates but he's right, there's more to running a country than public health and we cannot realistically enforce lockdowns for another year, that's just insane.

Gates should probably reflect a lot more before making statements on public health that might make rational sense to him but make no sense to the working man or woman out there struggling to survive in this pandemic.

Some things Gates has said about how the pandemic will dramatically change the world are spot on, but others are guesses.

Do I think business travel will be reduced in the years ahead? Yes, absolutely, companies worried about the bottom line will scrutinize business travel a lot more carefully and encourage their workers to do as much as possible using Zoom, Teams or WebEx. 

And this will go on even after the world returns to normal, whatever that means in a post-COVID world.

Offices will still be there but working from home will not go away, it will be encouraged and some companies (large tech companies) will adopt it permanently.

What we need now more than ever is a multi-prong approach to dealing with the pandemic and future pandemics.

We need cheaper, faster tests (including COVID sniffing dogs), we need to get people educated and vaccinated, we need to respect health protocols for as long as it takes to flatten this bloody curve, and we need to educate people about the benefits of vitamin D and other things they can do to reduce their risk of getting COVID in the first place.

I heard about an anecdotal story which came from a credible source of a New York City teacher whose entire family got COVID except her. Dumbfounded, doctors checked her blood type (it wasn't O) and asked her how did six members of her household get it and she was spared. Turns out, she has been taking 15,000 IUs of vitamin D once a week for years and has adequate D in her system.

I have long touted the benefits of vitamin D and think every adult should be taking 1.000 IUs a day, and up to three and five times that amount in winter months. 

It won't stop COVID in its tracks and doesn't guarantee anything but it can make the prognosis a lot better if you get it. Only a well-tested vaccine can give you more peace of mind and even that doesn't guarantee anything.

Alright, back to OMERS Infrastructure. My favorite asset in that portfolio? That would be Bruce Power:

Bruce Power is a Canadian-owned partnership of TC Energy, Ontario Municipal Employees Retirement Systems (OMERS), the Power Workers’ Union and The Society of United Professionals. A majority of our employees are also owners of the business. Established in 2001, Bruce Power is Canada’s only private sector nuclear generator, annually producing 30 per cent of Ontario’s power at 30 per cent less than the average cost to generate residential power.

Ontario’s Long-Term Energy Plan is counting on Bruce Power to provide a reliable and carbon-free source of affordable energy through 2064. To do so, Bruce Power has signed a long-term agreement with the province to refurbish six of its eight units, investing $13 billion private dollars into these publicly owned assets. Bruce Power’s Life-Extension Program will create and sustain 22,000 jobs annually while injecting $4 billion into Ontario’s economy each year.

Bruce Power employs more than 4,000 people and, over the past 15 years, has been one of the largest investors in Ontario’s electricity infrastructure, providing billions in private dollars to the Bruce Power site — which continues to be owned by the province. The site is leased under a long term arrangement where all of the assets remain publicly owned while Bruce Power funds all infrastructure upgrades, makes annual rent payments, and pays for the cost of waste management and the eventual decommissioning of the facilities.

The site is located on the eastern shore of Lake Huron near Tiverton, Ontario, within the traditional lands and treaty territory of the people of the Saugeen Ojibway Nation (SON), which includes the Chippewas of Nawash and Saugeen First Nation. Bruce Power is dedicated to honouring Indigenous history and culture, and is committed to moving forward in the spirit of reconciliation and respect with the Saugeen Ojibway Nation (SON), Georgian Bay Métis Nation of Ontario (MNO) and the Historic Saugeen Métis, and to leading by example in this community and industry.

I've long argued that more Canadian pensions need to explore the nuclear power option over the long run, and not just invest in wind and solar farms.

OMERS is very lucky to have this company in its infrastructure portfolio. It's extremely well run and its CEO, Mike Rencheck, recently won CEO of the Year at the 2020 Ontario Business Achievement Awards.

OMERS Infrastructure has other great portfolio companies like LifeLabs which Michael Ryder mentioned above, but none are as big and as important as Bruce Power.

Alright, let me wrap it up there. 

Below, learn about why nuclear is the way forward if we are to tackle climate change and why Bruce Power is a leader in the field.

Second, Bruce Power provides Ontario with 30 per cent of the province's electricity at 30 per cent less than the average cost to generate residential power.

Also, learn about how Bruce Power is playing a major role in making sure hospitals are safe, not only in Canada but around the world.

Fourth, learn about how Bruce Power's Life Extension Program is one of Canada's largest infrastructure projects, and will provide clean, reliable, low-cost electricity to 2064 and beyond.

Lastly, OMERS President and CEO Blake Hutcheson joined Antoinette R. Tummillo for an in-depth conversation, hosted by the Empire Club of Canada, about his first 100 days as CEO, his commitment to safeguarding our members’ financial future and about “leaving the campsite better than you found it.” 

Great discussion, take the time to watch it.

Canada’s largest pension fund says policy measures across the globe to address the Covid-19 pandemic could fuel inflation after years of under-inflation while also spurring a rebound in employment and business investment.

“We’re keeping an eye on this because central banks have adjusted frameworks,” Mark Machin, chief executive officer of Canada Pension Plan Investment Board, said in an interview Tuesday. “There is also the risk of a wall of money in savings accounts -- $13 trillion in U.S. banks alone -- moving, and that transfer can cause inflation.”

Machin also sees the synchronized global economic upswing potentially creating further upward price pressure on commodities.

“Emerging markets are where you’re going to see a massive pickup in demand. And we’re very familiar with the infrastructure bottlenecks that exists and some economies’, especially in the Asian emerging markets, dependence on imports and commodities,” Machin said.

Another factor that could generate inflation is an uptick in infrastructure spending as a form of economic stimulus, he said.

“These things are happening because people are building the right things in the right way and there’s lots of investment happening, but you could flow through into some elements of fueling inflation, which will create challenges for some emerging markets and central banks over the time,” Machin said.

The global economic slump caused by the Covid pandemic has had a disinflationary effect, capping a decade in which the central banks of most advanced economies had already fallen short of their inflation targets. Now, the pension fund will be watching to see whether adjustments made by the central banks will spur more robust inflation as economies recover, CPPIB said in its Thinking Ahead report published Monday.

Inflation could still be held down below target levels if governments scale back plans for fiscal and monetary stimulus or if the recovery is unexpectedly weak, the board said. That would raise the risk that real interest rates remain near zero and business investment stays weak.

Widening Inequality

The overall pace of the recovery is the wild card. Machin says he doesn’t see the global economy rebounding to pre-pandemic levels before the second half of 2022.

Covid-19 will continue to be the biggest factor in the global economy in 2021, worsening the rich-poor divide, changing the pattern of trade and driving up public debt around the world, according to CPPIB.

“The pandemic has affected virtually everyone, but not equally,” it said in the report. “The economic crisis caused by the pandemic has exacerbated global inequalities, with social distancing and lockdown policies disproportionately hurting those who are more economically disadvantaged.”

For example, new immigration restrictions and an overall inability to travel for work have led to a significant loss of income for the working poor in developing countries, the pension fund said.

Machin said widening inequality could generate “a permanent scarring in the economy.”

Beyond the question of more economic stimulus, the pace of recovery will depend on how aggressively the disease continues to spread and how quickly vaccines are rolled out, the pension fund said.

Governments’ increased spending through the slowdown will probably push the global public debt-to-GDP ratio above 100%, which should be manageable for countries with control of their own monetary policies. For those without control or those that issue sovereign debt in foreign currency, “fiscal contraction over the medium term may be unavoidable as sluggish growth and high debt levels raise questions about fiscal sustainability,” the report said.

The nations that focused on testing and contact tracing and also managed to slow the spread of the virus through quarantines are in a better position to return to their pre-Covid trajectory, CPPIB says.

China Watch

The pension giant will be closely watching China’s pandemic exit strategy, it said, which could “serve as a helpful case study for policy makers in other countries.”

CPPIB expects global trade to rebound significantly next year. The pace of trade has accelerated regionally, particularly in Asia, it said, while in North America, the regional value chain linkage between the U.S. and Canada has continued to strengthen.

“Beyond 2021, more emphasis on resilience as compared to efficiency in production could reinforce tendencies towards intra-regional linkages, with both contributing to increased balkanization of international trade,” CPPIB said.

Before I give you my thoughts, take the time to head over to CPP Investments'Thinking Ahead website and scroll around. 

There are a lot of great insights there including how COVID-19 has disproportionately impacted women (and I might add, exacerbated pension poverty among women).

By the way, since CPP Investments has been very vocal arguing for more diversity and inclusion at the board level at Canadian companies, let me bring this item to your attention:

For the first time in over 20 years, all S&P 500 boards have at least one woman https://t.co/5ArO15JiLA

— Leo Kolivakis (@PensionPulse) December 15, 2020

Now, if only Canada can emulate our neighbor down south!! (we're nowhere close)

What else? On the Thinking Ahead site, you can also read CPP Investments'2021 Economic and Financial Outlook. The entire white paper is available here. 

Most of the things Mark Machin discusses in the article above come from insights from this white paper so take the time to read it as it's very well written and not long (16 pages in all).

Below, the four themes that underscore CPP Investments' outlook for next year:

I want to draw your attention to this page:

The pandemic has exacerbated inequalities around the world and it will likely lead to major transformations of global supply chains.

The disruption in global supply chains relates to theme 4 in the white paper, deglobalization:

The white paper also discusses the unprecedented monetary and fiscal response to the pandemic all over the world: 

Importantly, the Outlook 2021 clearly states the following:

The fiscal response will likely push the global public debt-to-GDP ratio above 100%. These levels of public debt should be manageable for countries with control of their own monetary policies. We will be watching for fiscal tightening that could slow the pace of the recovery. For countries without control over their own monetary policies, or those that issue sovereign debt in foreign currency, fiscal contraction over the medium term may be unavoidable as sluggish growth and high debt levels raise questions about fiscal sustainability. We will be watching for changes to fiscal frameworks, particularly in Europe where increased fiscal transfers among member states featured prominently in the policy response.

How is all this related to inflation? I'm not sure why Bloomberg jumped on the inflation bandwagon because if you read this white paper carefully, you'd conclude the risks of deflation are just as present as the risks of inflation. 

However, on CPP Investments' Think Ahead site, they link to this tweet from The Economist where there is an interview with Mark Machin in a podcast and one of the topics discussed in the podcast is whether inflation is dead:

On this week’s “Money Talks” podcast with @SimonLong55:

Is inflation really dead?
Mark Machin of @CPPinvestments on navigating pandemic-era risk
The survival secrets of America’s restaurant chains https://t.co/jyP634eiWj

— The Economist (@TheEconomist) December 11, 2020

You can listen to this podcast here and it's very interesting. It begins with a discussion on inflation in the first ten minutes (great insights) and the interview with Mark Machin begins at minute ten and last ten minutes. Take the time to listen to Mark Machin's comments. 

Mark talks about CPP Investments, its governance and its investments and he refers to the rising risk of inflation longer term.

He discusses their investment in Viking Cruises and the risks of commercial real estate, He mentions that working from home is here to stay but if you pick your spots and tenants correctly, and diversify across geographies and real estate categories, you can mitigate a lot of uncertainty. 

He also talks about the "wall of money" headed into infrastructure and discusses the risks of doing greenfield infrastructure (ie construction risk) and why they prefer investing in brownfield projects.

[See Barbara Shecter's Financial Post article where Machin discusses infrastructure in more detail, including their investment in Highway 407 and why they'd like to see governments privatize more infrastructure assets.]

On the recovery, he says the market is pricing in a "substantial recovery in 2021" but there could be a "significant correction" if there is a setback with vaccine rollout.

The other risk Mark Machin refers to is the huge transfer of capital from governments to companies and individuals and that could bring about inflation longer term.

When asked how to hedge against this risk, Mark Machin says "diversification" across geographies and different programs (emerging markets and all this different strategies across asset classes that will be great beneficiaries if inflation happens).

Alright, does this mean inflation will happen? No, not necessarily. 

Let me briefly give you my thoughts.

Three years ago, I discussed whether deflation is headed to the US, outlining seven structural factors that led me to believe we were 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 benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
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. Read more about this 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.
5. Rising inequality: Hedge fund and private equity titans 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.

These are the seven structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.

Has anything changed during the pandemic?  On many levels, things have gotten worse, the tsunami of liquidity the Fed and other central banks have unleashed has only exacerbated inequality, disproportionately benefiting Wall Street speculators, corporate titans, tech billionaires, and ultra rich families.

Now that central banks are backstopping madness we shouldn't be surprised everyone is making a mad dash for trash and retail speculators are trying to generate income in this nothing matters market:

Welcome to surreality. https://t.co/VvZ8ryNqch

— Danielle DiMartino Booth (@DiMartinoBooth) December 15, 2020

How will it all end? In tears, and don't take my word for it, listen to Charlie Munger:

Berkshire's Charlie Munger Warns Against Market Frenzy, Expects Lower Returns In Next Decade https://t.co/3R2KBzHIoT

— Leo Kolivakis (@PensionPulse) December 15, 2020

Of course, the market frenzy Munger warns of can last for a very long time but when it ends, fortunes will be wiped and devastation will hit Wall Street and Main Street.

And that's not exactly inflationary, central banks are basically sowing the seeds of the next deflationary crisis.

Are you confused? Don't be. Central banks can only create asset inflation and housing inflation, not real inflation which only comes from sustained wage gains. And wages aren't going up anytime soon.

So, call me a deep skeptic but all this talk of inflation is grossly premature and somewhat misplaced.

You can have cyclical inflation because the US dollar was weak this year boosting import prices but that's not to be confused with secular inflation.

The same goes for fiscal stimulus, it can only boost demand for a period of time but it doesn't lead to permanent inflation. 

Will the pandemic disrupt global supply chains? It already has. Will it lead to deglobalization? The verdict is out on this.

Anyway, I love this topic and would love to really go head to head with CPP Investments' Think Ahead team to flush it out appropriately because if you get it wrong, it will cost you billions in returns.

Once again, please take the time to listen to The Economist podcast featuring Mark Machin here (his interview starts at minute 10 after an interesting discussion on inflation).

Also, please take the time to read CPP Investments'2021 Economic and Financial Outlook. The entire white paper is available here. 

Below, Real Vision’s Roger Hirst uses Refinitiv’s best-in-class data to look at the potential for reflation in early 2021, or for a rollover in economic activity. Government policy has already been incredibly loose, but so far it has provided little more than life support, even if US equities have rallied. It may even be that we get inflation, rather than reflation if consumers start to spend before supply chains are replenished. Interesting discussion, take the time to watch this.

The $226-billion New York State Common Retirement Fund is undertaking a review of all energy companies it is invested in, to assess their readiness for the energy transition and dump those considered riskiest in climate-related investment.

As it pledged on Wednesday to transition its portfolio of holdings to one with net-zero greenhouse gas emissions by 2040, the pension fund—the third-largest in the U.S. after CalPERS and CalSTRS of California—said that it would complete by 2025 a review of all its holdings in energy companies to assess “their future ability to provide investment returns in light of the global consensus on climate change,” New York State Comptroller Thomas DiNapoli said.

“Those that fail to meet our minimum standards may be removed from our portfolio. Divestment is a last resort, but it is an investment tool we can apply to companies that consistently put our investment’s long-term value at risk,” DiNapoli added.

The Fund is currently concluding its evaluation of nine oilsands companies and will develop minimum standards for investments in shale oil and gas. By 2025, the reviews will include all fossil fuel sectors, including integrated oil and gas companies, other oil and gas exploration and production, oil and gas equipment and services, and oil and gas storage and transportation.

The Fund has been calling for years on ExxonMobil, for example, to start accounting for climate change risks.

In a letter to shareholders ahead of this year’s annual meeting in May, DiNapoli, in his capacity of Trustee of the Fund, wrote:

“As the world, ExxonMobil’s peers, and investors confront the climate emergency, ExxonMobil is carrying on as if nothing has changed. It is crystal clear to us that ExxonMobil’s inadequate response to climate change constitutes a broad failure of corporate governance and a specific failure of independent directors to oversee management.”

After the meeting, at which Exxon’s shareholders rejected proposals for a report on lobbying and a report on the risks of petrochemical investments, DiNapoli said that “Exxon, in particular, has made itself an outlier for its refusal to seriously account for the demands of a lower carbon global economy.”  

I read this article earlier today and it irritated me. It represents everything I hate about the current ESG mania and the politics of oil & gas.

Before I give you my thoughts, let me state flat out a few things so I don't get radical leftist  environmentalists after me:

• First, I'm not a climate change denier, I'm a hopeless cynic. I knew the world was screwed back in the mid 90s when I took Tom Naylor's ecological economics course at McGill. The combative economist taught us everything we needed to know about the sorry state of the climate 25 years ago. It wasn't good back then and it's far worse now.
• Second, I welcome innovation and disruption in all fields, including energy. I was investing in solar stocks before the ESG crowd knew what solar and wind power were all about. 
• Third, if we are going to really tackle climate change, we need to think well past solar and wind and look at nuclear as a clean source of power. Read my recent comment going over OMERS Infrastructure year in review, they are lucky to have Bruce Power as part of their portfolio. I wish more Canadian pensions would look into partnering up with big engineering firms to develop more nuclear power plants to produce clean energy (solar and wind won't cut it and they present problems for electric transmission grids).
• Fourth, while I believe in ESG over the long run, there is an ESG bubble going on right now as every asset manager on the planet is toppling over themselves to promote ESG and how their funds are the best ESG funds. They call themselves ESG funds but all they're doing is investing in the new tech fintech and cloud computing darlings, fueling a solar stock bubble and of course, fueling an electric vehicle bubble with Tesla being the poster child (even Dr. Bury is calling the company and its founder out).
• Lastly, and most importantly, apart from tobacco where I agree with those who think it's futile engaging with companies, divestment is a lazy, stupid and potentially dangerous strategy that is more often than not politically motivated.

On that last point, I even know people who argue that as long as Big Tobacco  offers great dividends and cigarettes are not illegal, who are we to make normative judgments? "As long as it's legal, pensions have a fiduciary duty to invest where they find the best risk-adjusted returns." 

That is a viewpoint but like I said, I agree with Dr. Bronwyn King, the tobacco industry is responsible for millions of deaths all over the world and sky high healthcare costs, so even if smoking cigarettes is legal, I think pensions are right to divest as it's a dying industry.

Nonetheless, I don't place Big Oil and Big Tobacco in the same boat. The former provides the world's energy needs and we still need traditional hydrocarbon energy, at least for another hundred years.

Will we have planet one day where everyone is driving around in an electric vehicle? Sure we will but it's not going to happen overnight or even over the next ten years no matter what Elon Musk and climate change politicians tell you.

The world is changing, we all know this, and the pandemic is accelerating change, digitizing the economy and putting more pressure on policymakers  and institutional investors to address climate change.

And large Canadian pensions are doing their part in addressing climate change. They recently united pushing for more ESG disclosure and one is undertaking a mammoth infrastructure project which will end up drastically reducing carbon emissions in my city (this week, CDPQ Infra announced the REM will be extended to the east of Montreal, news I welcome). 

That's all great but none, I repeat, none of Canada's large pensions are divesting out of oil & gas and the reason is simple, they prefer engaging with these companies on ESG matters and they are acting in the best interests of their members. 

Back in September, I wrote a comment on Big Oil for the long run where I said the valuations of integrated oil giants were very compelling and maybe it's time to invest in Exxon (Goldman just woke up and upgraded Exxon today).

It was a friend of mine who first brought Exxon to my attention and he was a bit early investing in it but he kept adding as shares plunged and still has a significant stake: 

I liked it from a purely technical perspective as it was forming a beautiful double bottom on the weekly chart:

But I'm not going to lie, the big money these days is in solar stocks like SunPower (SPWR) because that's what the big funds and Robin Hoodies love buying:

Still, if I was a pension manager worried about risk adjusted returns and liquidity, I wouldn't be jumping on solar stocks here and I'd definitely be focusing more on traditional energy stocks (XLE) including pipelines that offer stable dividends.

Having said this, in a world where BlackRock and other large institutional investors keep telling you they're looking to reduce their carbon footprint, investing in traditional energy is like swimming against the current.

I can say the same thing about shorting the Teslas of this world, it's like fighting a losing battle.

Will Dr. Burry be proven right on Tesla? Who knows? I don't think he realizes how markets are much more manipulated nowadays than in 2008 (hard to believe but true).

In a world where central banks and Wall Street choose who the winners and losers are, selling short any company can lead you down the road of ruin if you go against the Power Elite.

As far as the $226-billion New York State Common Retirement Fund, I hope it doesn't follow the divestment crowd but I fear it will, again for purely political reasons, not logical ones based on sound investment decisions (they will say it makes perfect long-term sense but neglect to account for the cost of divesting).

And that's the most important point I want to get across, divesting out of any investment represents a cost, a cost plan members and taxpayers ultimately bear.

In an ideal world, we would all be driving Teslas, singing koumbaya songs and feeling good about the climate, but it's all nonsense and some people need to stop treating ESG as a religion and put their big boy pants and skirts on. 

Pension fund managers have a fiduciary responsibility to deliver the highest risk-adjusted returns. Period. If that includes investing in traditional carbon economy, let them do their job.

Lastly, let me remind you what Michel Leduc, Senior Managing Director and Global Head of Public Affairs and Communications at CPP Investments shared with me after I wrote a comment defending its high-carbon approach (total nonsense but environmental zealots love hyperbole):

On these matters, we respect the legitimate act of people disagreeing with some of our investments. So, by choice, we always begin with finding common ground. There is always something to agree with. We agree that climate change is real, serious and happening now. We also agree about investing in the renewable sector. It is the smart thing to do. Like every other sector, we need to select opportunities carefully. Yet, we have found excellent renewable energy assets to add to the portfolio, achieving meaningful exposures in a relatively short period of time thanks to an exceptional internal team of experts. 

We disagree that divestment is a good option. We believe that a challenge of this global scope requires everything in our toolkit: understanding the forces of change such as technology & innovation; global, national and sub-national policies that will affect the pace of the evolution; and household/corporate purchasing trends. All this data and insights to help us shape our portfolio in step with the evolution from traditional to renewable sources over the next decades. Importantly, some of significant oil & gas companies are among powerful forces, as agents of change, because they have the financial incentives/motives; technical know-how and capital to be instrumental players and integral to the evolution taking place. Starving them of capital takes out a critical part of the toolkit. As noted, every part of the toolkit has a role to play on this. Then, there is the value of engagement influence by strong knowledgeable investors. If not us, then who? 

 Divestment simply does not work. In fact, it is counter-productive to the very cause of the authors.

Let that sink in and this comes straight from Canada's largest and most important pension fund.

Alright, let me end it there, please don't shoot the messenger, I'm all for ESG but remember, I'm a hopeless skeptic and question everything, including the current ESG mania.

Speaking of ESG, Mantle314 and Ortec Finance recently held a very interesting webinar "Acing the TCFD: Scenario Analysis and Climate Disclosure" which you can view here.

Joy Williams of Mantle314 sent me this:

Scenario analysis has been challenging for many and there was too much to cover in one webinar! But we wanted to give everyone a flavour of how significant the preparation is to the entire process of scenario analysis. Also how using specific experts like Mantle314 for strategy and Ortec, as a quantitative modeller, can really help companies leapfrog this process. The one takeaway that I hope everyone heard is that this is a learn by doing exercise. It will be some time before there is a full plug and play option for scenario analysis and the more organizations that start getting into the details, the better. I love this subject and look forward to many discussions with people!

Recall Joy did work for the New York Common Fund's decarbonization advisory panel (see here) and even delivered remarks which you can read here. (the views expressed here are my own, not hers!)

Below, New York State has one of the biggest pension funds — $226 billion — and many are calling for it  to divest from oil and gas companies and decarbonize by 2040. 

Be careful what you wish for, making a rash decision to divest from oil & gas might end up costing New York's taxpayers and pension fund members dearly down the road, but the ESG zealots don't care, they only see Big Oil as blood money (never mind the great jobs the industry produces).

Update: Joy Williams of Mantle314 shared this with me after reading this comment:

Thanks for commenting on this news - I do think it's news that needs to be highlighted - and would like to offer two thoughts in a purely personal capacity (the Decarbonization Advisory Panel wrapped up more than a year ago now). I have a love/skeptical relationship with headlines like these, but want to focus on the substance of the article and your comments. First, I've always said that if an investor takes the step of divestment, which investors do every day with thousands of stocks when they decide to sell, it should be the result of a sound and thoughtful investment process and consistent with their strategy. Divestment in and of itself is not an investment strategy. I believe we are aligned in this as you're saying that investors need to pay attention to how the world around is changing and not jump on bandwagons. Second, I would point out that the NYSCRF has been looking at the issue of climate change for years and, in fact, had done quite a bit before establishing the advisory panel, of which I was honoured to chair. The advisory panel itself took about a year and then the CRF has been active for over another year in implementing their action plan - so not exactly a snap judgement. Wherever the CRF lands on this issue, I know there are many smart people working on it and look forward to seeing more leadership from them.

I thank Joy for her feedback and once again, the opinions expressed in this post are purely my own.

Second, Clive Lipshitz sent me this updated paper from the Boston College Center for Retirement Research on ESG investing and public pensions which explicitly states that boycotting companies is unlikely to have any impact on the price of their stock and ends on this sobering note:

The evolution of social investing from economically targeted investments and state-mandated divestments, where public plans clearly sacrificed return, to shareholder engagement and ESG investing, where the goal, at least, is to maintain market or better returns, is definitely a step forward. But both data and theory show that stock selection is not the way to reduce smoking or slow the rise in the earth’s temperature. And focusing on social factors, at least for public pension plans, does not appear to be costless – plans earn less in returns and fail to capture beneficiaries’ interests. Most importantly for public plans, the people who are making the decisions are not the ones who will bear the brunt of any miscalculations.

I thank Clive for sending me this paper which you should all read here.

Almost half the focus companies of Climate Action 100+ – the world’s largest ever investor engagement initiative on climate change – have now established commitments to reach net-zero emissions by 2050 or sooner, its latest progress report reveals. 

 The Climate Action 100+ 2020 Progress Report also outlines the significant growth and evolution of Climate Action 100+. There are now 545 investor signatories, responsible for over USD52 trillion in assets under management and engaging with 167 companies through the initiative.

But despite the significant growth in signatories and net-zero commitments, the report details ongoing gaps in target coverage, with only a small proportion of net-zero goals including the companies’ most material indirect (known as Scope 3) emissions. 

The report details sector-level progress for the focus companies that are engaged by investors through Climate Action 100+, which comprises of the world’s 100 largest corporate greenhouse gas emitters and over 60 more who are critical to accelerating the transition to net-zero emissions. Company-level progress against the goals of the initiative will be reported in the first quarter of 2021 under the recently announced Climate Action 100+ Net Zero Company Benchmark. 

Overall, the Climate Action 100+ 2020 Progress Report finds: 

• 43 per cent of the initiative’s focus companies now have goals or commitments for net-zero emissions by 2050 or sooner in some form. While 51 per cent also have short-term emissions reduction targets (to 2025) and 38 per cent have medium-term targets (2026-2035).
• Just 10 per cent of focus companies have net-zero targets that include coverage of their most material Scope 3 emissions. 
• 26 per cent of electricity utility companies on the initiative’s focus list have coal phaseout plans that are consistent with the Paris Agreement goals (up from 13 per cent in 2019).
• 194 new oil and gas projects sanctioned by focus companies this year are misaligned with the Paris Agreement goals. Further, 68 per cent of planned oil and gas capital expenditure was also inconsistent with these goals. 
• Automotive focus companies are still largely falling short of the investment required to switch technologies at an appropriate pace from internal combustion engines to hybrid and electric vehicles.

Writing in the 2020 Progress Report, former Governor of the Bank of England and current United Nations Special Envoy for Climate Action and Finance, Mark Carney, said: “Investors are increasingly focused on assessing how well companies are positioned for both climate change and the net–zero transition, by identifying which companies will be on the right and wrong side of climate history. Climate Action 100+ has been leading this charge, providing the momentum, stewardship and analysis to support the world’s highest-emitting companies in the strategic resets they need to make. Companies are clearly taking note.”  

CalPERS Managing Investment Director, Board Governance & Sustainability and Climate Action 100+ global Steering Committee member, Anne Simpson, said: “We are in the foothills of a long climb. Tackling the world’s systemically important carbon emitters is ambitious and necessary. It requires partnership from all sides: investors, companies, policymakers, and civil society. The results from Climate Action 100+ show what can be achieved, and what still lies ahead, for us to drive the transition to net zero by 2050.” 

Laetitia Tankwe, Advisor to President Jean-Pierre Costes, Groupe Caisse des Dépôts, Ircantec and Climate Action 100+ global Steering Committee Chair, said: “In the five years since the Paris Agreement was signed, we have seen an explosion of engagement on climate risk. Climate Action 100+ signatories have been in the vanguard of this effort and we are proud to see progress in even the most resistant sectors and countries. In the coming year, we will be evolving our benchmark and our efforts to better reflect the just transition element of our work, without which global progress will be impeded.” 

Asia Investor Group in Climate Change (AIGCC) Executive Director and Climate Action 100+ global Steering Committee member, Rebecca Mikula-Wright, said: “This report details significant progress on climate change from a number of Asian focus companies as a result of cooperative engagement with investors, including the emergence of a raft of net-zero emissions commitments.  As engagement between Asian investors and companies deepens, and regional governments announce new goals and measures to support the net-zero transition, we can only expect this trend to accelerate.” 

Ceres Chief Executive Officer and President, and Climate Action 100+ global Steering Committee member, Mindy Lubber, said: “We’ve been pleased to welcome two of the largest U.S. asset managers to the Climate Action 100+ initiative this year and to see the increasing corporate momentum around net-zero ambition. If we are truly going to limit global temperature rise to no more than 1.5°C, we know the world’s largest corporate emitters have to act and transition to net-zero businesses. We look forward to the ongoing investor engagement in the year ahead to drive higher corporate ambition.” 

Investor Group on Climate Change (IGCC) Chief Executive Officer and Climate Action 100+ global Steering Committee member, Emma Herd, said: “Climate Action 100+ is engaging the most emissions-intensive companies in the world. Ensuring they act on climate change is critical to achieving the Paris Agreement goals and reducing financial risks. While we have seen a welcome boost in commitments to net-zero emissions in 2020, significant further engagement is needed to ensure these goals are robust and embedded in core business decisions.” 

Institutional Investors Group on Climate Change (IIGCC) Chief Executive Officer and Climate Action 100+ global Steering Committee member, Stephanie Pfeifer, said: “Investor engagement has been key to delivering the wave of net–zero commitments from companies during 2020. Firms yet to come forward with net–zero plans will come under growing pressure as investor willingness to escalate their engagement will be the new norm. Work will also continue to support those companies that substantiate net–zero goals with robust business strategies. Long-term ambition needs to be made real with clear short- and medium-term targets, and capex alignment to support delivery of those goals.” 

Principles for Responsible Investment (PRI) Chief Executive Officer and Climate Action 100+ global Steering Committee Vice–Chair, Fiona Reynolds, said: “Climate Action 100+ signatories have demonstrated the power of engagement to drive company action in the face of the climate emergency. In the coming year, we expect to amplify our efforts using the Climate Action 100+ Net-Zero Company Benchmark, which will score companies on their progress and make clear who are leaders and who are laggards.” 

About Climate Action 100+

Climate Action 100+ is an investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. 545 investors with USD52 trillion in assets under management are engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. The companies include ‘systemically important emitters’, accounting for two-thirds of annual global industrial emissions, alongside others with significant opportunity to drive the clean energy transition.  

Launched in December 2017, Climate Action 100+ is coordinated by five investor networks: Asia Investor Group on Climate Change (AIGCC); Ceres; Investor Group on Climate Change (IGCC); Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI). These networks, along with five investor representatives from AustralianSuper, California Public Employees’ Retirement System (CalPERS), HSBC Global Asset Management, Ircantec and Sumitomo Mitsui Trust Asset Management, form the global Steering Committee for the initiative.  

For more information, visit: ClimateAction100.org; and follow: @ActOnClimate100.

You can download the full  Climate Action 100+ 2020 Progress Report here.

Let me first thank Anne Simpson for sending this report over to me as well as Marcie Frost, CalPERS CEO, who asked Anne to contact me.

Anne sent me this note as well:

Marcie just shared with me your recent piece discussing the follies of divestment. We thought you might find the progress report from Climate Action 100+ of interest as it shows the impact of engagement to address climate risk (and opportunity of course). CalPERS is the convener and co-founder of this initiative as you may know.

Thank you for always providing such thought provoking and frank commentary. We look forward to your fierce critique!

In case you have not read it, Anne was referring to my last comment on New York's pension joining the divestment crowd.

In a nutshell, I have some serious reservations on pensions divesting out of oil & gas and the whole ESG mania sweeping the investment world.

After I wrote my last comment, Clive Lipshitz sent me this updated paper from the Boston College Center for Retirement Research on ESG investing and public pensions which explicitly states that boycotting companies is unlikely to have any impact on the price of their stock and ends on this sobering note:

The evolution of social investing from economically targeted investments and state-mandated divestments, where public plans clearly sacrificed return, to shareholder engagement and ESG investing, where the goal, at least, is to maintain market or better returns, is definitely a step forward. But both data and theory show that stock selection is not the way to reduce smoking or slow the rise in the earth’s temperature. And focusing on social factors, at least for public pension plans, does not appear to be costless – plans earn less in returns and fail to capture beneficiaries’ interests. Most importantly for public plans, the people who are making the decisions are not the ones who will bear the brunt of any miscalculations.

You should all read this paper here.

Now, I want to make it clear, even though I'm not a big believer in divestment (except tobacco where engagement is truly futile), I do believe a solid ESG framework and welcome initiatives such as Climate Action 100+.

There's nothing wrong with global investors driving business transition. Climate Action 100+ is an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

I'm all for it as long as this initiative enhances the long-term sustainability of investments and is in the best interests of the members of global pension plans.

Where I have a problem is when the lines get blurred and the politics of oil & gas come into play, leading to shortsighted and frankly, terrible decisions to divest which raise the cost of the plan.

For me, ESG isn't a religion, it's not about politics, it has to first and foremost enhance the long-term sustainability of pension investments.

I'm very worried of an ESG bubble and long term investors getting caught up in the ESG mania without carefully thinking about the consequences of their actions.

In fact, an astute observer sent me this critical article by Kevin Freeman after reading my last comment. It begins like this:

The hottest area of investing today is ESG, which stands for Environmental, Social, and Governance. To some, ESG means “sustainable investing.” Over $30 trillion worldwide has been dedicated to ESG. That’s truly amazing. This trend has developed very rapidly and is the talk of Wall Street. But what does it really mean?

I will let you read the rest of this article here but let me tell you, I agree with him here:

The reality is that ESG is a buzzword with different meaning to different people and therein lies the problem. It is so wide open that people can have all sorts of agendas at work. Some investors want to “save the planet.” For others, it’s a hot new marketing gimmick to attract money. Still others want to push a certain political agenda and use your money to do it.

Stop a moment and consider that the best experts claim ESG was $30.1 trillion in 2018 and that assets were growing at an exponential rate. Current estimates suggest the total now tops $40 trillion. The goal is to use investment dollars to promote a certain outcome.With ESG, investment returns are not necessarily the main goal. And, while the specifics may be nebulous, it seems obvious that the generalities are centered around left-leaning political ideals.

And that's where I have a huge problem with ESG, when the primacy of long term returns takes a back seat to advancing some cause, no matter how noble that cause may be.

I also have a problem when politically connected people use large US public pensions to advance their political agenda.

Case in point, Tom Steyer, the billionaire founder of Farallon Capital Management, turned philanthropist/ environmentalist/ liberal activist who ran and lost against Joe Biden in the Democratic primaries.

Mr. Steyer carries a lot of political clout in California, he even made a guest appearance at a CalSTRS board meeting five years ago arguing to divest from coal and oil & gas.

See the problem? Powerful billionaires influencing the investment decisions of US public pensions to advance their political and ideological causes. 

And who is brave enough to go against Steyer in California? Nobody, it's political suicide as that state is run by liberal, left-leaning environmentalists and they will crush anyone who isn't on the same page as them.

But I know people, very smart people, who would have argued very well against Tom Steyer's proposal and exposed significant weaknesses in his presentation and thinking.

Of course, these people aren't billionaires and are nowhere near as powerful as Tom Steyer, or Bill Gates or other billionaires who have a green agenda.

This is why I prefer Canada's pension governance system. Keep governments and billionaires out of our public pensions, let professional pension fund managers manage pension assets in the best interests of beneficiaries and all stakeholders.

This doesn't mean Canadian, American and global pensions cannot advance ESG goals as long as they are in the best interests of all stakeholders. 

Getting back to Anne Simpson of CalPERS, I agree with her,'there's a letter missing in ESG’:

The $393bn California Public Employees’ Retirement System (Calpers) is the United States’ largest public pension fund.

It bases its risk and return valuations on the interactions between financial capital, human capital (employees and the community) and physical capital (natural resources and physical assets), says Anne Simpson, Calpers's managing investment director of board governance and sustainability. Unless all those forms of capital are well understood and incorporated into corporate reporting, not much will change, she says.

Q: Will the next US administration under president-elect Joe Biden make a difference?

A: Money talks. Politics may have the microphone right now, after the US presidential elections, but the economic logic behind sustainability is what's driving investors in this direction. Look at the S&P 500 index – 30 years ago, 85% of the balance sheet was tangible; 85% of the balance sheet now is formed by intangible assets.

What's happened in the economy is that human capital is a huge part of value creation. At the US Securities and Exchange Commission Investor Advisory Committee [from which I am now stepping down] we were able to build a framework for how companies in the US should start reporting. [This year] there was a three to two vote in support of [looking further into] the principles of reporting on human capital management. It didn’t adopt the more detailed-line items though, so view this as work in progress.

Q: How do you make environmental, social and governance (ESG) factors more urgent?

A: My conclusion, at this stage, is that there's a letter missing. We have environmental, the E; social, the S; governance, the G – but there's no F for finance.

In some markets like the US, ESG is viewed as something that nice people do. It's something for family offices, it's imbued with do-goodery. That missing F, for a pension fund, has meant that it was really quite hard to get moving on ESG. If we can add F to ESG, the knock on effect on accounting and financial markets would be transformative.

Q: An even busier sustainability alphabet? Isn’t your ultimate goal that ESG (or ESGF) becomes redundant because those factors will automatically be included in investment decisions?

A: Yes, a measure of success is that we would just talk about investment. We are fiduciaries, this is how we take care of other people's money. Anyone who is not thinking about climate change or impact on workers or worrying about health and safety, any investment strategy that doesn’t consider those factors will be flawed.

For the big asset managers in the world like Calpers, success means that those letters will not feel needed, a little flag over what we're doing; those factors will just be thoroughly well-integrated in managing risk, and also in seeking out the returns that we need to pay pensions over the long term.

Anne is right, we need to add an F to ESG and all investors need to integrate an solid, well thought out ESG framework to evaluate the long-term risks of their public and private asset holdings.

In this regard, I welcome the efforts of CalPERS and of of Climate Action 100+ and other institutionally led efforts to improve ESG reporting and accountability.

Lastly, since I am on this topic, USPRwire reports the pandemic-induced boost to climate change fight opens investment opportunity:

2021 is on track to be the biggest year yet in the global fight against climate change as the COVID-19 crisis has spurred worldwide political support for the "build back better" movement.

Massive amounts of government spending earmarked for 2021 to support both the economy and new, ambitious net-zero emissions targets have positive implications for investors say two Toronto-based investment professionals, who were recently certified as global Sustainability and Climate Risk (SCR) experts.

Catherine Ann Marshall, SCR, Principal Consultant at RealAlts, and Tania Caceres, SCR, Principal at Risk Nexus are among the first professionals globally to earn the SCR credential making them members of an elite network of sustainability thought leaders, according to the Global Association of Risk Professionals (GARP). The pair say that many government investment initiatives to push a "green recovery" will also provide attractive new investment opportunities to the private sector.

The latest action to unleash government funds is expected Friday (Dec.18, 2020) as the European Parliament votes on the 2021 portion of the multi-year 1.82 trillion European Green Deal Investment Plan. The Plan has a binding target of reducing greenhouse gas emissions by 2030 by at least 55% from the 1990 level.

This Plan follows other recent spending announcements by Canada and the UK, and expectations that president-elect Joe Biden will convene a climate summit within his first 100 days in office. All of these developments added to the momentum in 2020 to fight climate change. More than 110 countries, including major greenhouse gas emitters China, Japan and South Korea, have now committed to becoming carbon neutral by mid-century, according to the United Nations.

Last week the Canadian government unveiled its C$15 billion multi-year green recovery plan which focuses on energy retrofits for real estate, clean transportation, annual increases in the carbon tax until 2030, and support for green industry and nature-based climate solutions. This came on the heels of the announcement of a binding net zero target for Canada by 2050.

Since the summer, and as recently as this month, the UK government made a series of announcements targeting a 68% cut in carbon emissions by 2030 supported by almost 7.4 billion in green recovery initiatives, with more spending to come in future. The UK pledged in 2019 to achieve net zero emissions by 2050.

"These announcements mean governments are taking action to protect against the physical risks of climate change, but they will result in companies facing transition risks as the economy moves away from fossil fuels," said Ms. Caceres, who has 20 years of experience managing real estate investment risk across Canada and Europe. "The good news is that the transition will open up many new investment opportunities" she said.

"For instance, the UK government has announced it will partner with private infrastructure investors on green investments such as railroads," said Ms. Marshall, a real assets expert with 20 years of investment experience. "Other new investment opportunities will include clean energy production and energy retrofits for real estate. These investments have a history of producing solid income returns, and in this low yield environment, they are a welcome opportunity."

With extensive experience as institutional investment professionals in real assets, the pair are uniquely positioned to recommend how to invest sustainably in real estate and infrastructure.

In bestowing the SCR certificate to Ms. Marshall and Ms. Caceres, GARP said "the SCR distinction makes you one of the area's first subject matter experts, joining you with an elite network of thought leaders."  

I congratulate Catherine Ann Marshall and Tania Caceres for obtaining the SCR credential and would urge my institutional readers to reach out to them for further insights.

Below,  Anne Simpson, managing investment director for Board Governance & Sustainability at CalPERS, discusses balancing portfolios and a climate emergency.

Also, CalPERS CEO Marcie Frost recently told CNBC's Squawk Box: "We're watching for when the markets actually more align with the actual real economy but we have to think, again, very long-term, past the one year, past the three year."

I'm not sure this market will be aligned with the real economy any time soon, I see this market frenzy going on for a while, backstopped by the Fed and other central banks, but you'll have to wait for my end of week market comment on Friday to read my views. 

Update: Professor Ingo Walter of NYU's Stern School of Business who co-authored an important paper with Clive Lipshitz comparing US and Canadian pensions plans (see here), sent me a recent paper he wrote, Sense and Nonsense in ESG Ratings which you can view here.

I note the following:

Within this heuristic, sensible ESG considerations can be a useful in diagnosing relevant issues, broadening the discourse, anticipating developments in the outer realms of the social control platform, and encouraging timely adjustment and engagement on the part of firms. To the extent that this increases revenues, lowers costs, and, especially, reduces idiosyncratic risk of the kind that is most difficult to calibrate, it can also enhance a firm’s value as a going concern.

On the other hand, except as a way of flagging important social costs and signaling ways of dealing with them, ESG scoring and its misuse can be a convenient shortcut for stakeholders averse to hard work and critical thinking. Its key weaknesses run from identification and causality problems, self-reporting and greenwashing, quality of the primary data collection process, indicator mismatch in the use of secondary data, factor aggregation and weighting, setting scoring breaks, and reporting formats. This is a formidable list, with key dimensions that can frustrate transparency, replicability, and therefore credibility. Given the current state of play, it follows that there are a number of issues that must be addressed to reinforce ESG assessments and make them more defensible in capital allocation and enterprise management. 

Professor Walter outlines seven things that need to be done to improve ESG ratings. Please take the time to download and view this paper here (registration is free). 

Also, I thank Lindsey Walton, Head of Canada's PRI for sharing this Climate Action 100+ case study featuring BCI and Teck Resources:

Cool stuff, it shows you how engagement can bring about positive change.

Stocks slipped from record highs in volatile trading on Friday as lawmakers struggled to bridge differences on additional coronavirus stimulus measures.

The Dow Jones Industrial Average fell about 124.32 points, or 0.4%, to 30,179.05. At its session low, the 30-stock benchmark shed more than 270 points. The S&P 500 dipped 0.4%, or 13.07 points, to 3,709.41, while the Nasdaq Composite lost 0.1%, or 9.11 points, to 12,755.64. All three indexes touched new intraday highs earlier in the day after closing at records in the previous session.

Leaders on Capitol Hill said they are close to an agreement that would provide $900 billion in additional aid. The talks, which have stretched on for months, are up against the wire, with federal funding lapsing at 12:01 a.m. ET on Saturday.

Senate Majority Leader Mitch McConnell, R-Ky., said Friday that the negotiations “remain productive.” “In fact, I am even more optimistic now than I was last night that a bipartisan, bicameral framework for a major rescue package is very close at hand,” he added.

House Majority Leader Steny Hoyer, D-Md., said in the afternoon that the chamber would go into a recess until 5 p.m. while congressional leaders try to get a “clearer picture” of how to move forward. He told representatives to keep Friday night, Saturday and Sunday free.

Last-minute disputes preventing Congress from passing a relief deal include direct payments, small business loans and a boost to unemployment insurance.

Big volume

The stock market experienced massive volume on Friday as Tesla’s historic entry into the S&P 500 will be based on prices at the close. There was a rush of activity into the final bell and the S&P 500 will begin trading with Tesla as a member on Monday.

With a market capitalization of more than $600 billion after a 700% rally this year, the electric carmaker will be joining as the seventh-largest company in the index. 

Tesla is being added to the benchmark in one fell swoop, marking the largest rebalancing of the S&P 500 in history. It’s estimated that passive funds tracking the S&P 500 will need to buy more than $85 billion of Tesla, while selling $85 billion of the rest of the index to make room for it.

Shares of Tesla jumped as much as 4% to hit an all-time high on Friday before closing just 0.4% higher. More than 181 million shares of Tesla changed hands, quadrupling the 30-day average volume.

Several major exchange-traded funds like the Invesco QQQ Trust (QQQ), which mirrors the Nasdaq 100, will be rebalanced alongside the S&P 500 Friday.

Meanwhile, the Tesla inclusion coincides with a quarterly event known as quadruple witching, when options and futures on indexes and equities expire. Many expect Friday will be one of the busiest trading days of the year.

Winning week

Major averages eked out gains for the week despite Friday’s weakness. The Dow gained 0.4% for the week. while the S&P 500 advanced 1.3% for its its fourth positive week in five. The tech-heavy Nasdaq outperformed with a 3.1% gain for the week.

Stocks gained earlier this week amid optimism toward a stimulus deal as well as the vaccine rollout. On Thursday evening, Food and Drug Administration advisors overwhelmingly backedModerna’s Covid vaccine, a key step towards public distribution approval by the FDA. The first inoculations in the U.S. were given Monday with Pfizer and BioNTech’s vaccine.

Investors were betting that a rise in Covid cases as well as disappointing economic data would push lawmakers to cement a new aid package. Jobless claims last week hit their highest level since early September, while retail sales fell more than anticipated in November.

“The bad news this week is that the third wave continues to get worse, and the economic damage from the pandemic continues to mount,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “The good news is that policy is starting to succeed in containing the virus, and the federal government will likely pass a stimulus bill, mitigating both major risk factors.”

McMillan said investors should expect more volatility in the short term amid developments on the stimulus and vaccine front, before the economy returns to growth in 2021. “With vaccines now available and ramping up, we are at the end of the beginning of the pandemic, and markets recognize that,” he added. 

Alright, it's Friday, time to cover markets and once again, there's a lot to cover.

First, the good news, the FDA did overwhelmingly back Moderna's Covid vaccine and since it doesn't need to be refrigerated at extremely cold temperatures, I expect this one will be shipped in rural areas all over the United States and ready to be administered starting Monday morning.

The vaccine can't come soon enough as US coronavirus deaths soared to a daily record of 3,580 and hospitalizations rose for the 19th straight day on Wednesday.

Amazingly, some Americans still refuse to wear a mask in public for political reasons. They should listen to former New Jersey Gov. Chris Christie who is urging people to wear a mask, saying he was wrong to remove his during a White House celebration in October.

I am very happy today for this ad to start to run on TV across America. I urge all Americans to learn from my experience and to, please, wear a mask and stay safe. pic.twitter.com/DGmOValDJo

— Governor Christie (@GovChristie) December 16, 2020

"You're twice as likely to get COVID-19 if you don't wear a mask, because if you don't do the right thing, we can all end up on the wrong side of history, please wear a mask." 

Apart from wearing a mask in public, physical distancing and washing your hands often, I keep telling people to increase their intake of vitamin D as they wait to be vaccinated (and even after they're vaccinated):

“Vitamin D treatment should be recommended in Covid-19 patients with low levels of vitamin D circulating in the blood since this approach might have beneficial effects in both the musculoskeletal and the immune system,” said the Spanish study’s co-author, José Hernández, PhD, of the University of Cantabria in Spain. Neither study can say for sure that the deficiency causes the negative outcomes or whether other factors are involved — such as people with the deficiency having other underlying health conditions, or lacking health insurance or access to hospitals.

Yet another study actually tested the effects of vitamin D on Covid-19 patients by adding it to the treatment for one group and not another. Among 26 people who didn’t get the vitamin, half ended up in the intensive care unit and two died. Among the 50 people who got the vitamin, one went to ICU and none died. The results require follow-up research to be conclusive, the scientists wrote in the Journal of Steroid Biochemistry and Molecular Biology. Willett calls vitamin D the “most promising” supplement under study for Covid protection.

Dosage: The U.S. Recommended Dietary Allowance (RDA) for adults is 600 IU (international units) daily. But there’s no firm agreement on this. “I think 2,000 to 4,000 IU per day will get most people out of the deficiency zone and is safe,” Willett says.

Now, as far as the stimulus package, Congress is trying to pass a two-day government funding extension as it has only hours to prevent a shutdown. 

I can't believe lawmakers are struggling to finalize a $900 billion coronavirus relief package, but leave it up to Congress to leave everything right down to the wire.

I still think they'll pass something this weekend and if they don't, it's simple, markets will tank next week (unless they keep extending talks).

Alright, let's get to markets starting off with everyone's favorite EV play (not mine), Tesla.

So Tesla made it into the S&P 500 and a bunch of funds that hate it had to buy it today, sending the stock up another 6% on huge volume:

I tend to agree with him and looking at Tesla's 5-year weekly chart below, I can't help think this is it for this EV juggernaut:

By the way, what happened to short sellers? I told you, the Fed infected them with monetary coronavirus months ago and there's no vaccine to treat that, you just have to wait for the collective madness of crowds to play out.

And let me tell you, pockets of this market are in a full fledged mania.

Check out the red hot solar stocks below:

There's no ESG bubble? It's all rational behavior? Save it!

"Ah, come on Leo, don't be such a Debbie Downer, you used to love solar stocks!".

Yes, I did, until I got scorched badly as will a whole new legion of neophyte investors who buy stocks that make them feel good because they're ESG compliant and "only go up, up and away." 

I'm not saying all solar stocks are bad (stick with FSLR and SPWR) but there's definitely way too much optimism here and I suspect the minute Joe Biden gets sworn in as the 46th President of the United States, a lot of investors will be taking their profits on these red hot solar shares (it might even be happening now).

I tell all traders/ investors, any time you see a parabolic move like that, book your profits, don't be shy to sweep the table after such monster moves.

What else is going on this week? Hedge funds are buying more Crowdstrike (CRWD), Fireye (FEYE) off the SolarWinds Russia hack and Jumia Technologies (JMIA):

Like David Tepper said, "these are stocks you rent, not own" and a bunch of hedge funds are renting them, big time!

When will this market frenzy end? It's tough to say in these TINA/ FOMO markets dominated by large quant funds, but nobody rings a bell at the to or the bottom, that much I do know.

In the meantime, we all await Congress to pass the bloody stimulus package already.

They will or else Republicans will lose the Senate runoff elections in Georgia early next month and they simply can't afford to lose those elections.

But you never know, the dysfunctional behavior in Washington has reached epic proportions.

Anyway, let me wrap it up here with this week's sector performance, and the best performing large cap and small cal stocks:

Below, Short Hills Advisors' Steve Weiss and the rest of the Halftime Report traders discuss the markets and where they see things headed from here. With Shannon Saccocia, Boston Private Wealth Management.

And Andy Blocker of Invesco discusses the odds a deal on a new stimulus package will be reached, and what's ahead for Congress and other leaders in Washington in 2021.

I think they will strike a deal right on time for Christmas and for Republicans to stand a chance to win the Georgia runoff elections, but you never know with these dysfunctional politicians in Washington.