Ontario Teachers' Pension Plan Board (Ontario Teachers’) and KKR have each acquired a 20% holding in Caruna, Finland’s largest electricity distribution company, from First Sentier Investors (FSI). In a separate transaction that also completed today, AMF has acquired Keva’s 12.5% holding in Caruna. Both transactions have received all necessary regulatory approvals.

Separately, Ontario Teachers’ and KKR have signed binding documentation to acquire a further 40% holding in Caruna from OMERS, which will increase their ownership to 40% each. This later transaction is expected to close during the second quarter of 2021, pending regulatory approvals.

No further details around these transactions were disclosed.

KKR is making the investment through its core infrastructure strategy which focuses on investing in high quality regulated assets in developed OECD markets. Since 2008 across its global infrastructure business, KKR has deployed more than $24 billion in more than 40 infrastructure investments. Ontario Teachers' is Canada's largest single-profession pension plan. It has extensive experience in investing in regulated electricity transmission and distribution businesses, as well as the broader energy sector. AMF manages the employment pension insurance funds of approximately 4 million Swedish individuals and companies and is owned by the Swedish Trade Union Confederation (LO) and the Confederation of Swedish Enterprises (Svenska Näringslivet).

"The electrification of society and the increase of renewable energy production – key elements of Finland’s decarbonization plans – require a strong and smart electricity network. We are convinced that Caruna is well-placed to build a smart and weatherproof electricity network for its customers that will meet growing consumption needs while helping transition to a low-carbon economy. We are committed to investing in Caruna to achieve these goals," says Dale Burgess, Senior Managing Director, Infrastructure & Natural Resources at Ontario Teachers’.

"Caruna’s owners are large and well-established infrastructure investors with significant experience and resources to support and develop the company over the long term. The company and its personnel will continue to operate in accordance with its existing strategy and business plan," says Matti Ruotsala, Chairman of the Board of Caruna.

Upon the closing of all three transactions, the ownership of Caruna will be as follows:

• KKR 40%
• Ontario Teachers' 40%
• AMF Pension 12.5%
• Elo Mutual Pension Insurance Company 7.5%

For more information: Matti Ruotsala, Chairman of the Board of Directors, Caruna. Contacts via Caruna's media phone, tel. +358 20 520 5500

Caruna distributes electricity and maintains, repairs and builds a weatherproof electricity network for its approximately 700 000 customers in South, Southwest and West Finland, as well as in the city of Joensuu, the sub-region of Koillismaa and Satakunta. In order to guarantee a reliable electricity supply to its customers under all circumstances, Caruna supervises its network 24/7. A weatherproof smart electricity network also provides a well-functioning energy system for the future when digital services increase, the traffic is electrified, and the consumer becomes a producer of energy.

www.caruna.fi, Twitter @CarunaSuomi

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

This is a great deal and the key passage in the press release is this:

"The electrification of society and the increase of renewable energy production – key elements of Finland’s decarbonization plans – require a strong and smart electricity network. We are convinced that Caruna is well-placed to build a smart and weatherproof electricity network for its customers that will meet growing consumption needs while helping transition to a low-carbon economy. We are committed to investing in Caruna to achieve these goals," says Dale Burgess, Senior Managing Director, Infrastructure & Natural Resources at Ontario Teachers’.

Dale and his team are doing a great job at OTPP, shifting their attention away from transportation assets which were hit hard last year to more stable infrastructure assets like electric grids.

This deal is a large co-investment with KKR which is making the investment through its core infrastructure strategy which focuses on investing in high quality regulated assets in developed OECD markets. 

On Caruna's website, I read the following:

So, it's a highly regulated industry and one that is growing as electricity demand grows over the next decade (think electric vehicles and digitization of the economy).

KKR and OTPP will reap great long term dividends on this investment, much better than investing in a public utility company that trades on a stock exchange.

Of course, when it comes to electric grids, we know where we are heading but not all countries are up to par.

In the US, for example, PEW Charitable Trusts found that electric cars will challenge state power grids.

A McKinsey study found that the aging electric transmission and distribution (T&D) grid in the United States needs to be significantly upgraded to withstand the challenges of the future.

And this is before the disaster that struck Texas last month. 

Kenneth P. Green of the Fraser Institute wrote a great comment on how Texas provides a cautionary tale for Alberta and the planet. The gist of it is this:

The recent winter storm (not historically unprecedented, despite the Sharknado labelling of “Polar Vortex”) left thousands of Texas households without electric power in lethally cold temperatures that, while nothing to downplay, would have been easily survivable (as they are in places around the world including Canada) with an adequate infusion of affordable reliable power from readily available hydrocarbons. At one point last week, a reported 2.5 million Texans were without power including 1.3 million in the Houston area. The statewide number increased to 3.5 million later that day and power (and subsequent water outages) left many in Houston and its surrounding areas boiling and scrambling to find potable water.

Of course, the renewable lobby is spinning faster than the fastest of wind turbines in trying to convince people that the Texas shift to wind and solar power had nothing to do with thousands of Texans shivering in the dark—while sitting on massive reserves of readily accessible oil, gas and coal (yes, coal).

And as Reason magazine’s Ron Bailey points out, it actually wasn’t the sudden drop in wind and solar power output that was directly to blame; it was the languishing of sufficient pipeline capacity and backup power generation maintenance that’s part and parcel of the wind and solar power agenda.

This is the real lesson of renewable power. It’s not that wind and solar power are “bad” or “scarce” or even “expensive” for the wealthier of the world, at least. But wind and solar power are unfortunately unreliable and require backup power sources that are almost always rendered non-economic in systems with a heavy renewable power component, especially when those same jurisdictions want to phase-out hydrocarbons and the infrastructure that enables their production and use.

Nobody, especially Albertans, should buy the renewable booster’s spin. A world powered by the wind and the sun is a beautiful dream—but that’s all it is, a dream. In reality, Alberta, the country and indeed the whole world desperately need power that can be produced safely, reliably and affordably with the hydrocarbons sitting under our feet. That’s where Alberta’s policymakers should understand if we’re to learn a proper lesson from our Texas cousins.

I shared this with Leo de Bever who commented:

My take on this is a bit different. Texas is not well integrated with the US electric grid because it felt it did not need the rest of the US. Bad call. This had little to do with renewables. The gas pipe network was poorly insulated so that piece broke down. 

Do we need storage? Absolutely. Not 8 hour storage but much longer. I am trying to do that in the North to displace diesel with solar and ammonia storage and pump storage. Still tough. 

Can we replace oil and gas with renewables by 2050? Not likely. So I am making the oil and gas guys mad because I believe they should cut extraction GHGs, but they think price increases will allow them to get by and do nothing. T

he environmentalists have their math wrong on how fast you can go sustainable and have enough storage to keep the grid stable. 

A friend of mine who is an engineer and has worked on power grids has a different take:

Again, a somewhat simplistic view, the cascade started with renewables failing. They failed in such an abrupt way that grid operator started to load shed. 

And if Texas was part of the national grid, power outages would have occurred in neighboring states.

Unfortunately they cut the power to gas transmission pipelines so the gas plants couldn’t ramp up to keep the grid stable. 

The fundamental problem is the intermittent nature of renewables and how they cause cascading problems in transmission. 

Also, I have never heard of gas pipes freezing. there may be valve malfunctions because actuators were no longer electrified.

Anyway, the point is that grids are not tried and tested.

But Leo is right, batteries may help.

Why am I sharing all this? Not because Finland is Texas (nothing like Texas and their grid is a lot more stable), but to demonstrate how investing in power grids isn't as simple as people think, especially in the United States where there are a whole host of problems in some states.

Luckily, with this investment in Caruna, Ontario Teachers' and its trusted partner, KKR, do not have to worry about renewables causing a cascade of events that will leave Finland in the dark.

This is a great long term investment which brings Ontario Teachers' stable long term returns and closer to its goal of achieving net zero emissions by 2050. 

In other related news, TricorBraun was acquired by Ares Management and Ontario Teachers’ Pension Plan:

Global packaging leader TricorBraun (the “Company”) announced today the completion of its previously announced definitive stock purchase agreement with funds managed by Ares Management Corporation’s Private Equity Group (“Ares”) and Ontario Teachers’ Pension Plan Board (“Ontario Teachers’”). Ares and Ontario Teachers’ have acquired a majority interest in the Company.

“We are excited to continue our exceptional growth with Ares and Ontario Teachers’ as our partners,” said Court Carruthers, President and CEO, TricorBraun. “We look forward to working with Ares and Ontario Teachers’ to deliver exceptional service to our customers while continuing to build the best place for the best people in packaging.”

TricorBraun is North America’s largest primary packaging distributor and one of the largest providers of packaging in the world. The company serves consumer packaged goods companies, from cutting-edge start-ups to the world’s most iconic brands, and is a critical packaging provider for the essential personal care and household cleaning, food and beverage, and healthcare/nutraceutical industries. From rigid to flexible packaging, stock and custom capabilities, and countless options of materials, industries, and markets served, TricorBraun’s range of packaging solutions sets it apart. Serving customers since 1902, TricorBraun has grown to $1.5 billion in annual sales, with more than 1,100 team members in 50 locations throughout North America, Europe, and Asia.

TricorBraun’s management team, including Executive Chairman Keith Strope and Carruthers, will continue to lead the Company. TricorBraun’s leadership team will also retain a significant investment in the company, as will its former majority owner, AEA Investors.

“With the completion of our investment in TricorBraun, we are looking forward to taking the next step in partnering with the Company, Ontario Teachers’ and AEA,” said Brian Klos, Partner in Ares’ Private Equity Group. “We are excited about working with the talented team at TricorBraun as we look to build upon the Company’s success and history of growth.”

“TricorBraun has served as its customers’ trusted packaging partner for more than 100 years,” said Karen Frank, Senior Managing Director, Equities, Ontario Teachers’. “We are pleased to partner with Ares, AEA, and the strong management team to support TricorBraun’s next stage of growth and innovation.”

Terms of the deal were not disclosed.

About TricorBraun
Founded in 1902, TricorBraun is North America’s largest distributor of primary packaging and one of the largest purchasers of packaging in the world. The company provides innovative solutions across a wide array of customer end markets in plastic and glass containers, closures, dispensers, tubes, and flexibles. TricorBraun operates from 50 locations globally. Our award-winning Design & Engineering Center provides forward-thinking design, driven by consumer insight and creative solutions. Other services include global sourcing, manufacturing oversight and global supply chain programs. Visit www.tricorbraun.com.

About Ares Management Corporation
Ares Management Corporation (NYSE: ARES) is a leading global alternative investment manager operating integrated groups across Credit, Private Equity, Real Estate and Strategic Initiatives. Ares Management’s investment groups collaborate to deliver innovative investment solutions and consistent, attractive investment returns for fund investors throughout market cycles. As of December 31, 2020, Ares Management's global platform had approximately $197 billion of assets under management with more than 1,450 employees operating across North America, Europe and Asia Pacific. For more information, please visit www.aresmgmt.com.

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

Again, another great co-investment with a great partner, Ares, to acquire a global leader in primary packaging, TricorBraun, a company with a long history and $1.5 billion in annual sales. 

These deals are significant and demonstrate how OTPP is committed to finding investments with stable returns and committed to reducing its carbon footprint.

Below,  a clip on how Caruna ensures that society can function by providing reliable electricity distribution:

Our basic function is to ensure uninterrupted and weatherproof electricity distribution to our 692,000 customers. A reliable electricity network is an essential aspect of the reliability of supply in society. The more digitalised a society is, the more important reliable electricity distribution becomes. 

We are placing electric cables underground to protect them from extreme weather. This is also freeing up land for agriculture and forestry purposes, as well as for use as carbon sinks. We facilitate the digitalisation of society through the joint construction of electricity and telecom networks, as well as municipal infrastructure.

Our growing customer base and developing electricity network are key prerequisites for our ability to create value for our customers and society. This is supported by Caruna's strengths: high-quality supply chain management, skilled personnel and close cooperation with partners.

In the future, Caruna may, for example, function as a platform for developing new kinds of services and smart energy solutions to help the decisions of customers.

Sounds like a very promising future and Ontario Teachers' members now own a big stake in it.

Also, a great clip on the design and engineering at TricorBraun. It shows you how intricate the primary packaging industry is and why this company is a global leader.

Today, British Columbia Investment Management Corporation (BCI) announces a commitment to five-year climate-related targets for its public markets program. The near-term targets represent a significant step by the leading provider of investment management services to British Columbia’s public sector to further benefit from the opportunities and address the risks associated with climate change.

BCI will target a cumulative $5 billion investment in sustainability bonds by 2025 (based on initial participation) and reduce the carbon exposure in its global public equities portfolio by 30 per cent by 2025 (using 2019 as a baseline).

“BCI always works in the best financial interests of our clients. Assessing and managing the opportunities and risks presented by climate change is core to that responsibility. These targets will help ensure our clients benefit from the shift to a low-carbon economy,” said Gordon J. Fyfe, BCI’s chief executive officer / chief investment officer.

“Importantly, they set concrete near-term goals that will help us track our progress as we continue to champion long-term and sustainable growth.”

The setting of these targets represents a carefully considered evolution of the objectives set out in BCI’s 2018 Climate Action Plan, and further complements BCI’s strategic approach of leveraging environmental, social, and governance (ESG) for both value creation and risk management.

As a growing number of governments, companies, and institutional investors establish strategies to help achieve the Paris Agreement objective of limiting global warming, BCI believes that it is in its clients’ best financial interests to set carbon-related targets that align with this international treaty. The goals are consistent with the guidance of the Task Force on Climate-related Financial Disclosures (TCFD).

“These targets balance ambition with feasibility and provide a clearly defined pathway for BCI to seize on climate-related investment opportunities and reduce the climate transition risk of our public markets portfolio,” said Daniel Garant, executive vice president & global head, public markets.

“BCI believes that gradually lowering exposure to carbon-intensive companies and engaging with companies and regulators to adapt to the low-carbon economy will lead to better financial outcomes for our clients.”

The commitment marks another milestone in BCI’s climate-related work, including becoming a founding signatory to the Principles for Responsible Investment (PRI) in 2006, supporting the TCFD recommendations, actively participating in Climate Action 100+ since 2017, and publishing its Climate Action Plan in 2018.

“BCI is committed to continuously improving and adjusting our approach to climate change to benefit our clients and their investments,“ said Fyfe.

BCI will report on progress in meeting these targets through its TCFD reporting, on its corporate website, BCI.ca, and in its ESG Annual Report.

About BCI

With $171.3 billion of managed assets as at March 31, 2020, BCI is the leading provider of investment management services to British Columbia’s public sector. We generate the investment returns that help our 31 institutional clients build a financially secure future. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients’ risk and return requirements over time. We offer investment options across a range of asset classes: fixed income; public and private equity; infrastructure and renewable resources; real estate and mortgages.

About BCI’s Public Markets Program

BCI’s public markets program manages a global portfolio of fixed income and public equity investments representing $112.8 billion and totalling 65.9 per cent of BCI’s assets under management (as at March 31, 2020). The program invests in Canada, the U.S., and internationally in developed and emerging markets utilizing index and active management strategies. More than 80 per cent of the program’s assets are managed internally using a diverse mix of financial instruments.

About BCI’s Climate-Related Targets

Fixed Income:

• The investment target of $5 billion builds on BCI’s historical participation in sustainability bonds of $887 million (as at December 31, 2020).
• The setting of transition finance targets aligns with best practice on financing the transition and contributing to a net-zero economy.
• The target will help BCI increase allocations to sustainable issuances of interest and leverage our competitive advantage in this space.

Public Equities:

• The 30 per cent reduction target will be measured using Weighted Average Carbon Intensity (WACI) as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).
• The 2019 baseline aligns with best practices among global investors and closely reflects BCI’s current investment strategy based on more active, internally managed mandates.
• BCI began measuring and publicly reporting the carbon footprint of the public equities portfolio in our ESG Annual Reportin 2017.
  

I've been meaning to get around to BCI and its climate-related targets for public markets.

I urge you to all read BCI's 2019 ESG Annual Report here and the 2018 Climate Action Plan here for more details.

 BCI's climate-related targets are specific to its Public Markets, not Public and Private Markets.

This left me a little confused and late today, I reached out to Gordon Fyfe, BCI's President and CEO and he was kind enough to call me back.

Gordon confirmed these climate-related targets are for Public Markets but he doesn't really like the term "targets" because the way he explained it to me, BCI implemented a strategy and "what you're seeing now is the residual of the strategy."

He also stated: "The reason why we put a five year period is because we implemented the strategy and are confident we can achieve it in a short period and this way our employees and members can see and feel the progress."

Gordon spoke very highly of Jennifer Coulson, BCI's Vice President of ESG and told me I should read the articles and press releases where she discusses BCI's ESG approach.

So I did, one of them was about how BCI raises expectations on board diversity and addressing climate change risk in new Proxy Voting Guidelines: 

Today, British Columbia Investment Management Corporation (BCI) published new Proxy Voting Guidelines detailing our evolving expectations regarding the governance practices of the publicly-traded companies in which we invest. The new guidelines raise our expectations on increasing board diversity, addressing climate change risk, and reviewing executive compensation in the context of COVID-19 and its impact on human capital.

BCI updates the guidelines every two years. They reflect ongoing research of corporate governance best practices and BCI's understanding of evolving risks facing publicly-traded companies as represented in shareholder proposals.

Significant changes made to the guidelines include:

Diversity and Inclusion: BCI advocates for the 30% Club's target of 30 per cent women on all boards and c-suites globally, including at all S&P/TSX composite index companies by 2022, where 110 of 224 companies still do not meet that threshold.

• BCI now expects that women directors will comprise at least 30 per cent of a company's board of directors.

"Boards and executive management have an important role to play in promoting and fostering diversity and inclusion," said Jennifer Coulson, vice president, ESG, public markets.

"We expect boards to adopt and disclose a formal diversity policy that includes targets and timelines to increase levels of diversity at the board and senior management level."

Events of the past year have further reinforced the need for companies to also focus on diversity among other underrepresented groups. BCI will consider diversity more broadly as disclosures permit.

Climate Change: BCI believes companies that do not carefully consider issues of environmental and social responsibility risk failing to create shareholder value. There is also increasing regulatory and investor pressure on companies to provide climate-related disclosure.

• BCI will consider supporting more prescriptive shareholder proposals on climate change to publicly signal our expectation that companies must act immediately.
• BCI will escalate the targeting of directors for weak responses to climate change risk.

"We expect directors to oversee management's efforts to manage climate change-related risk," said Coulson.

"BCI will consider supporting more prescriptive proposals, including those asking companies to align emission reduction targets with best practices such as net-zero by 2050."

Executive Compensation: BCI believes pay decisions are one of the most direct and visible ways for shareholders to assess the performance of the board of directors. Compensation plans must align with pay for performance and be sensitive to the broader workforce and societal context.

• BCI will escalate votes against company directors for poor compensation practices as part of a more holistic review of compensation considering the impact of the COVID-19 pandemic.

"While we have seen progress in compensation plan design, we remain concerned that total pay continues to increase rapidly, especially in the U.S. market," said Coulson.

"COVID-19 presents additional concerns about employee safety, layoffs, and capital allocation decisions relating to dividends and share buybacks."

BCI expects that implementing these guidelines will assist and encourage boards to remain focused on building shareholder value while holding them accountable for actions taken.

A searchable database on our website provides an account of all our proxy voting, including the rationale for when we vote against a management proposal and all shareholder proposals.

You can read our complete Proxy Voting Guidelines here: https://uberflip.bci.ca/i/1337653-bci-proxy-voting-guidelines-2021/0

The way Gordon explained it to me, Jennifer has an important role not only in actively engaging with public companies they invest in but also in shaping BCI's entire ESG strategy across public and private markets.

In another article, Paula Sambo of Bloomberg News reports B.C. pension seeks $5B in green bonds by 2025:

The Dow Jones Industrial Average jumped to another record high on Friday as rising reopening optimism continued to encourage the rotation into cyclical stocks. Meanwhile, surging bond yields rekindled valuation fears and took the comeback momentum out of tech names.

The 30-stock benchmark climbed 293.05 points, or 0.9%, to close at a record at 32,778.64. Bank stocks gained amid rising rates, while industrials continued their strength on the back of new stimulus. Goldman Sachs shares jumped 2%, and JPMorgan climbed 1.2%. Boeing and Caterpillar popped 6.8% and 4.2%, respectively.

The S&P 500 erased earlier losses and inched up 0.1%, eking out a record close of 3,943.34. Tech and communication services were the only two sectors registering losses. The Nasdaq Composite shed 0.6% as rates surged. Alphabet and Facebook dropped 2% each, while Apple, Amazon and Microsoft all closed in the red.

The 10-year Treasury yield jumped 10 basis points to 1.64% at its session high Friday, hitting its highest level since February 2020. The benchmark rate started 2021 at around 0.92%.

The rapid rise in bond yields prompted investors to dump the Nasdaq names again after a brief rebound earlier this week. Sharp increases in interest rates can put outsized pressure on high-growth tech stocks as they reduce the relative value of future profits.

“Higher rates, less dovish central banks are now considered to be the single biggest threat for risk assets,” Ralf Preusser, Bank of America’s rates strategist, said in a note. “With the passage of the US fiscal stimulus package and the blistering progress in vaccinations in the US, a number of other key risks are falling by the wayside.”

Ned Davis Research estimated that the Nasdaq 100, the tech heavy index which tracks the 100 largest non-financial companies in the Nasdaq Composite, would drop another 20% if the 10-year yield hits 2%.

Friday’s sell-off pared the Nasdaq’s weekly gain to 3%. The S&P 500 rose 2.6% this week, while the blue-chip Dow outperformed with a 4% rally. The Russell 2000 advanced 0.6% to a record Friday, bringing its gains this week to more than 7%.

“I think the story is becoming very, very clear in the tech sector. We have incredibly high valuations and yields that have tripled from the low last year,” said Robert Conzo, CEO of The Wealth Alliance. “You are going to see a lot of volatility in the tech sector. There’s a better trade out there in the cyclicals.”

Investors piled into names tied to an economic recovery after President Joe Biden’s $1.9 trillion Covid-19 relief package became law.

Biden’s much-anticipated relief bill will send direct payments of up to $1,400 to many Americans as soon as this weekend, and will also put nearly $20 billion into Covid-19 vaccinations and $350 billion into state, local and tribal government relief.

Biden announced Thursday evening that he would direct states to make all adults eligible for the vaccine by May 1 in his first primetime address as president. Biden also set a goal for Americans to be able to gather in person with their friends and loved ones in small groups to celebrate the Fourth of July.

Ari Levy of CNBC also reports the tech-heavy Nasdaq has underperformed the Dow for four straight weeks — a first since 2016:

Investors are finally rotating out of tech stocks after a decade of outperformance.

For the fourth straight week, the tech-heavy Nasdaq Composite trailed the Dow Jones Industrial Average. It’s the longest such streak since April-May 2016, which was also the only year since 2011 that the Dow beat the Nasdaq.

Market experts have been predicting a tech cooldown for years and have been consistently wrong, thanks to the increasing dominance of mega-cap companies like Apple and Amazon, the frenzy around Tesla and the massive shift in spending to cloud computing.

“It’s been years of frustration trying to get that trade right,” said Jack Ablin, who oversees $12.5 billion as chief investment officer at Cresset.

Ablin said this time feels different. Starting in the fourth quarter, his firm rolled out a new “quality dividend strategy,” moving clients out of technology and into industrials, financials, materials and energy companies. He was betting on a Democratic sweep in November, followed by a big stimulus package that would pump money into the economy, leading to inflation and higher interest rates.

The 10-year Treasury rose to its highest level in over a year on Friday, reaching as high as 1.642%. Rising rates give investors an incentive to shift money towards fixed income, while inflation tends to have an outsized impact on growth companies because it dampens expectations for future profits.

Meanwhile, the $1.9 trillion coronavirus relief package that President Joe Biden signed on Thursday will send direct payments of $1,400 to most Americans, and will also expand the child tax credit and provide rental and utility assistance.

‘Pent-up demand’

Add to that Biden’s pronouncement that all adults will be eligible for a Covid-19 vaccine by May 1, and the economy looks poised for a big rebound in 2021.

“There’s pent-up demand for actually going out and doing stuff, taking vacations, going to bars and restaurants,” Ablin said. People are going to “take all that money on the sidelines and spend it,” he said.

Even though Biden and the Democratic Congress are focused on expanding green energy alternatives, the current outlook for travel and getting back to work is benefiting traditional oil and gas companies. Within the S&P 500, energy stocks are performing the best this year, up 40% as a group. The top-performing groups this week were consumer discretionary stocks, real estate and utilities.

The Dow Industrials rose 4.1% for the week to close at a record 32,778.64. After three straight weeks of declines, the Nasdaq climbed 3.1% to 13,319.87. For the year, the Dow is up 7.1%, while the Nasdaq has gained 3.4%.

Ablin knows that it’s too soon for a victory lap. Even as tech broadly is underperforming, there’s still a ton of money going into even more speculative assets. Bitcoin has almost doubled in value this year, and on Wednesday a non-fungible token (NFT) by the artist Beeple sold for more than $69 million in an auction through Christie’s.

Ablin said he was just asked about NFTs by a client on Thursday. While he admits to not having a strong viewpoint on them, he said that if recipients of stimulus money opt for risky investments instead of traveling and buying consumer goods, the market could look very different in the coming months.

“If it really doesn’t get spent but gets plowed into the market, that would pull the rug out from under our thesis,” Ablin said. For example, he said, “If instead of taking their vacation, they go buy Tesla stock.”

Tesla shares did jump 16% this week. But that was after tumbling 30% over the prior month.

Earlier today, Tom Lee told CNBC he believes the technology sector likely put in its bottom for the year last week, part of his broader view that the S&P 500 overall has more room to run.

“I think tech made its local bottom for the first half. I think tech is going to rally,” the Fundstrat Global Advisors said on “Halftime Report,” adding later in the interview it could be the sector’s low for the year.

So did tech shares put in a bottom? When I look at my short-term indicators, it looks like they have as long as the Nasdaq-100 ETF (QQQ) breaks above its 20-day EMA (around 317) and sustains the uptrend:

And even my 5-year weekly chart tells me tech shares bounced off their 30-week moving average (300) and if they get above the 10-week moving average, they might have another run-up:

But the weekly MACD is still down and the daily one is still negative even if it's turning up so that tells me it could be very choppy for tech in the coming weeks and we might see a retest of the recent lows.

Another chart of the Nasdaq I look at is the one-month chart to see critical levels and if we do not see it crossing above 13,600, it's not a good sign:

The truth is tech shares, especially hyper growth Cathie Wood ARK shares, had a huge run-up, there was way too much crowding in these names and I wasn't surprised many of them got slammed hard last week when rates moved up.

And even though the ARK Innovation ETF (ARKK) bounced back this week, it still remains weak and fragile here as the unARKing of the market was brutal last week:

Rates moved up again today with the yield on the 10-year US Treasury note backing up almost 11 basis points to close at 1.63%, a yearly high:

But this time the market didn't go haywire, tech shares sold off initially but only marginally and they came back late in the day. 

What was interesting today is the so-called fear index, the CBOE Volatility Index (VIX), actually dropped despite the backup in long bond yields:

What that tells me is the market and its participants have internalized the rise in long bond yields and they have come to accept that it's part of a broader economic recovery story.

S&P 500 up 2.6% this week at an historic high with 10-year yields over 1.6%, highest in over a year? Could it be the market is finally getting comfortable that higher yields is reflective of a stronger, “normalized” economy and not runaway inflation? @CNBC$SPY#markets

— Bob Pisani (@BobPisani) March 12, 2021

Still, as Ned Davis Research notes, a 2% 10-year yield could knock 20% off tech stocks:

Surging bond yields sent technology shares sliding into correction territory at one point, and there could be an even more severe sell-off ahead if rates keep going higher, according to Ned Davis Research.

So, it's not at all clear how markets will react if long bond yields keep backing up.

Nonetheless, the selloff in long bond prices (TLT) -- ie. the backup in long bond yields (bond prices are inversely correlated to yields) -- might be overdone in the near term and rates should stabilize around these levels:

Remember, bad things happen when yields rise too fast, really bad things.

Of course, the fed and the ECB know all this and they've been purchasing long bonds. 

This week, the ECB announced plans to ramp up bond buying to tackle surging yields:

The European Central Bank has said it expects to increase its bond purchases “significantly” next quarter, after borrowing costs rose in the region.

The ECB opted on Thursday to leave its Pandemic Emergency Purchase Program, or PEPP, unchanged, at a total of 1.85 trillion euros ($2.21 trillion) due to last until March 2022.

However, the central bank’s bond purchases in the first quarter have been lower than usual and the Frankfurt-based institution said it expected to ramp up its purchases going forward.

10-year bund yields cratered, at least initially, and that helped ease the backup in US 10-year yields, at least for a day.

Like it or not, central banks play an integral part in these markets, providing liquidity and backstopping risk taking activity.

The ECB basically told global hedge funds and Wall Street to keep piling on the risk, they're going to ramp up their bond purchases.

And now all eyes are on the Fed after the ECB juiced up the bond yield divergence trade.

It remains to be seen what the Fed does but clearly it will not sit idly by if bond markets go haywire.

Getting back to stocks, this week we saw the Dow take off as the Nasdaq languished and it was mostly owing to the spectacular gains Boeing's shares registered:

And they can continue ripping higher although I suspect they will stall and correct around the 200-week moving average: 

Still,  I suspect any correction here will be bought hard and if the share price does cross above its 200-week moving average, it will continue ripping higher.

There are plenty of other Dow stocks like Caterpillar (CAT), Disney (DIS) and Goldman Sachs (GS) that are doing exceptionally well this year but they're overextended here and you really need to pick your stocks carefully in all indexes or risk getting hurt.

Anyway, here is how S&P sectors performed this week:

Interestingly, Consumer Discretionary (XLY), Real Estate (XLRE) and Utilities (XLU) led the pack despite the rise in bond yields. Energy (XLE) and Communication Services (XLC) posted marginal gains and lagged the rest of the sectors.

And here are this week's best performing large cap stocks:

You read that correctly, GameStop (GME) was at the top of the pile (unbelievable but true). Boeing wasn't even in the top twenty best performers this week, which goes to show you how strong the markets were.

And forget small cap stocks (IWM), they're continuing to rip higher, making record gains:

Below, CNBC's "Halftime Report" team is joined by Tom Lee of Fundstrat Global Advisors about his expectations for the markets and economy.

Also, CNBC's Scott Wapner talks with the "Halftime Report" team to break down how they're investing right now.

Lastly, Liz Ann Sonders shares her perspective on the US stock market and economy in this monthly Market Snapshot video. She's great, listen to her insights.

Asif joined CAAT in 2010 and holds the position of Managing Director of Public Markets, a role where he has led the team responsible for the Plan’s $11 billion public markets portfolio. Through a combination of effective external manager selection and strategic internal structuring decisions, Asif’s team has outperformed market benchmarks over the long-term.

Outside of work, Asif is proud to serve on the board of the Pension Investment Association of Canada (PIAC) and on the investment committees of the United Church of Canada Pension Plan and Nunavut Tunngavik, an organization supporting programs for Inuit in Nunavut.

Previous to CAAT, Asif held leadership roles at the Public Sector Pension Investment Board (PSP) and State Street Canada.

“We’re excited to have Asif take over leading our investment team at this critical juncture,” said Derek Dobson, CAAT Chief Executive Officer and Plan Manager. “Asif has the strategic vision, skills and experience we need to support the continued growth of the Plan, which is targeted to exceed $30 billion in assets by 2027.”

Asif will report directly to Derek Dobson and lead a growing team of investment professionals. Asif succeeds Julie Cays, Chief Investment Officer, who previously announced her plans to retire at the end of April 2021 and was named CIO of the year for 2020 by the Canadian Investment Review.

“I want to thank Julie for her countless contributions to CAAT and congratulate Asif on his new role,” continued Derek. “Julie has been an exemplary leader for CAAT, with influence far beyond Investments. We have full confidence Asif will be the same, helping advance our mission to expand defined benefit coverage to more workers across Canada.” 

Earlier today, I had a chance to catch up with Asif as well as Julie Cays, the outgoing CIO he will soon be replacing. 

Let me begin by thanking both of them for taking some time to talk to me as well as thanking John Cappelletti, the Senior Communications Advisor for setting this Microsoft Teams meeting up.

So, the purpose of this call was to catch up with Asif who I worked with at PSP years ago, to congratulate him on this important appointment and to also catch up with Julie who will soon be retiring. 

I told Asif he has big shoes to fill because Julie is a great CIO and I mean this in every sense, she's not only a great investment mind, she's also a really incredible person with great qualities that make her an outstanding leader.

Asif agreed and told me he has learned a lot from her over the last 11 years and plans on continuing on the same course she set, meaning leveraging off a great internal team and external partners across private and public markets to keep delivering solid results, making sure the plan remains fully funded.

It's important to note that Asif will oversee investment operations at a plan that is growing fast. John Cappelletti told me they manage roughly $15 billion now and in 2020, in the midst of a pandemic, they grew their membership by 7,500 new members. "As of the end of last year, we had over 70,000 members and 106 employers."

Today, CAAT announced that about 500 employees of St. John Ambulance are poised to join the CAAT Pension Plan through DBplus, effective April 1, 2021.

I fully expect more employers will join CAAT's award-winning DBplus and ironically, the pandemic has only fueled more demand for safe retirement solutions as employers recognize the need and that there is a cost effective way to provide a well governed DB plan to their employees.

I asked Asif what are the challenges he foresees and he replied: "The ones you cited in this conversation, namely, record low rates, more volatility so we really need to adopt the long view, manage our liquidity risk carefully to capitalize on opportunities as they arise and leverage off our external partners across public and private markets to capitalize on opportunities as they arise."

I specifically asked them about co-investments in private markets and here Julie interjected and said they're not quite at 50% co-investments like some of the larger pensions but are at "30% in Real Assets and a bit higher in private equity."

She also added: "We are now more selective with our co-investments and given that our managers operate in the mid market, we continue to find interesting deals to co-invest in." 

She agreed with me that private equity and real assets will be critical to obtain the required return and the co-investment approach is critical to reduce fee drag (Asif stated they are closer to their long term target weight of 35% in private markets; you can view their statement of investment policies and procedures here).

It's important to note that in private markets, Asif will continue to lean on Kevin Fahey who is responsible for the CAAT Plan’s private equity and real assets (infrastructure and real estate) investments.

Kevin is exceptional, I've heard nothing but good things about him and his experience and relationships in private markets are critical to the continued success of the team. 

The investment team will be growing. Asif told me they are 13 now and plan on hiring 8 new people this year. That might not sound like a lot but when you're a relatively small team, it is a lot.

But Asif has a lot of experience on-boarding and managing people (at PSP and CAAT) and even throughout the pandemic, their small investment team stays in touch regularly to talk shop but also to check in on each other and have some fun (you need to let loose or else it's too heavy and depressing).

He also spoke very highly about CAAT's investment finance team which is integral to their success.

As I stated, CAAT will be growing over the next decade, organically and growing new members, so its assets can easily triple over this period.

That growth has to be managed which is why you need a solid internal team and solid external partners.

I have no doubt Asif will be a great CIO, he has literally learned from the best there is (Julie is on another level) and he has a great team to lean on, especially Kevin Fahey who is as solid and good as they get.

His new boss, Derek Dobson, is scary smart but super nice and he's another highly experienced person Asif will be leaning on in good and bad times.

It's also important to note that CAAT recently announced it remained resilient through a tumultuous year:

The CAAT Pension Plan stands 119% funded on a going-concern basis, with a funding reserve of $3.3 billion, based on its latest actuarial valuation as at January 1, 2021.

Based on the Plan’s Funding Policy, the Plan governors determined that allocating additional reserves to further strengthen benefit security is the most prudent option at this time. Funding reserves maintain the Plan’s resilience and cushion the Plan against future economic or demographic shocks.

The valuation will be filed with the regulator by the end of March and posted to the Plan’s website. By opting to file this valuation this year, the Plan will not be required to file again before 2024.

Each funding valuation includes a review of the economic and demographic assumptions used to ensure they continue to be realistic and appropriate for the Plan’s risk tolerance. As part of this review, the Plan’s discount rate has been lowered to 4.95% from 5.15%. That means the Plan’s funded health improves when investment returns are greater than 4.95%.

The lower discount rate is consistent with the CAAT Plan’s focus on benefit security and sustainability, and reflects the asset mix and expected long-term market returns on the investment portfolio.

The CAAT Plan’s 2020 investment results will be released with its annual report on April 20, 2021.

“We entered the pandemic fortified with healthy funding reserves to protect the Plan against unexpected economic events. I’m pleased to report we ended 2020 stronger. The Plan’s funding reserves grew to $3.3 billion and our funding status improved to 119% — which means we have set aside $1.19 for every dollar of pension earned by our members.”
Derek W. Dobson, CEO and Plan Manager, CAAT Pension Plan

The focus at CAAT Pension remains squarely on managing assets and liabilities. The Plan made a wise and prudent decision to lower the discount rate (as other Canadian pension plans have done) to strengthen benefit security.

Markets are at an important inflection point, the so-called "easy money" driven by the liquidity tsunami has been made, there are going to be a lot tougher days ahead.

The good thing is Julie Cays has laid down the foundations for CAAT Pension Plan and Asif Haque will soon take over the reins. 

I'm confident he will do a great job and he has a great team to lean on. I wish them many more years of success and I honestly hope CAAT Pension grows its membership exponentially over the next ten years.

More DB pensions means more retirement security and that is good for the economy over the long run and good for the country as more people retire in dignity and security.

As far as Julie Cays, like HOOPP's former CEO Jim Keohane, she has mixed feelings about leaving a job she truly loves ("greatest job in the world"). 

I wish her a great retirement, hope she still stays active and hope to see her the next time she's in Montreal (great lady in every respect). 

Most of all, I hope she gets that face to face sendoff party she deserves once we put this bloody pandemic behind us, hopefully for good (crossing my fingers and toes).

Once again, I thank Julie, Asif and John for taking the time to chat with me earlier today and if there is anything that needs to be edited, I will do it as soon as possible.

By the way, John told me CAAT's 2020 results will be released on April 20th but knowing their asset mix and how diversified they are, I'm pretty confident they did well.

Below, a fantastic interview with Julie Cays, take the time to listen to her speak about her background, how she ended up as CIO of CAAT Pension Plan and how she changed and shaped their investment policies over the years and how they invest across public and private markets now. Watch it here if it doesn't load below.

Julie was integral to CAAT's success over the years and she recruited a great team to continue this success. She has laid great foundations for Asif Haque who will now be responsible for the next growth chapter of this increasingly important Canadian pension plan.

Private equity firm Peloton Capital Management and Canadian financial entrepreneur Stephen Smith have acquired proxy advisory and research firm Glass Lewis & Co., according to an announcement Tuesday.

Peloton and Smith bought Glass Lewis from the Ontario Teachers’ Pension Plan Board and the Alberta Investment Management Corp., known as AIMCo. Terms of the deal were not disclosed.  

The acquisition comes less than six months after Deutsche Börse said it was acquiring a majority stake in a Glass Lewis competitor Institutional Shareholder Services from its private equity owner Genstar Capital.   

“We see that proxy voting has become more important, as ESG topics become front and center for institutional investors,” said Peloton managing director Steve Faraone by phone on Tuesday. “We see Glass Lewis as well-positioned to serve that client base.” 

Peloton has ties to Ontario Teachers’: two of its founders, Mike Murray and Faraone, were managing directors at the pension fund before they struck out on their own to start the private equity firm in 2018. Smith, who is co-founder and chief executive officer of Canada’s First National Financial Corp., launched Peloton alongside them.

In addition to investing in Glass Lewis through Peloton, Smith invested alongside the firm, as the deal was larger than one Peloton would normally execute, Faraone said.  

Glass Lewis was acquired by Ontario Teachers’ in 2007. In 2013, AIMCo acquired a 20 percent stake in the proxy advisory firm, according to an announcement from Ontario Teachers’ at the time. Faraone said Peloton liked that Glass Lewis had been owned by the same investors for such a long time.  

“We like that stability and see an opportunity to continue the trajectory they have been on,” he added.  

A spokesperson for AIMCo said via email that the company is “proud of the role it has played since 2013” in helping the company “realize on its commitment to uphold strong corporate governance.” 

“We believe our stewardship of Glass Lewis has helped contribute to the advancement of good governance practices and healthy capital markets globally,” a spokesperson for Ontario Teachers’ added via email Tuesday. 

In 2019, Glass Lewis co-founder Kevin Cameron returned to the company and assumed the role of executive chair. He left his role as president in 2007, although he remained on the firm’s advisory council during his time away from leadership, an announcement from Glass Lewis at the time shows.  

“He’s helped to add to the team and recruited some additional people,” Faraone said of Cameron’s return. “We’re seeing a lot of investment in the research area.” 

Faraone said that this, along with Glass Lewis’s decision to open offices in London and Tokyo, made it an attractive investment option.  

“Peloton Capital Management and Stephen are committed to long-term, sustainable value creation through good governance,” Cameron said in the announcement on their purchase. “This aligns strongly with the core values we have established at Glass Lewis.” 

This is Peloton’s fourth portfolio investment, and first in the financial services sector. The firm is working on another deal — one that Faraone said is going a bit more slowly than the Glass Lewis acquisition. He did not share details on the target company.  

Peloton is still raising its first fund, which is targeting long-term capital. It plans to hold portfolio investments for seven to ten years, Faraone said.  

“For the right businesses and time frame, this strategy can lead to less distraction for management,” Faraone said. “It allows the business to focus on growth over that time frame.” 

This caught my attention earlier today and I read this press release on Glass Lewis' site: 

Peloton Capital Management and Stephen Smith have acquired Glass Lewis from Ontario Teachers’ Pension Plan Board (Ontario Teachers’) and Alberta Investment Management Corporation (AIMCo). Glass Lewis is the leading provider of independent global governance solutions. Its unbiased research reports that provide analysis and recommendations on every proxy vote, including M&A and other financial transactions, along with its industry-leading proxy vote management solutions drive value across all governance activities for institutional investors.

“Peloton Capital Management and Stephen are committed to long-term, sustainable value creation through good governance. This aligns strongly with the core values we have established at Glass Lewis,” said Kevin Cameron, Executive Chair at Glass Lewis. “Together, we can advance our mission to help our customers drive value across their governance and stewardship activities.”

“Capital markets participants have become increasingly focused on environmental, social, and governance (ESG) factors as they build their business strategies. Glass Lewis is very well positioned to provide solutions to address the global demands generated by this shift,” said Stephen. “Glass Lewis has built a venerable brand and we look forward to helping them deliver important governance solutions to the marketplace.”

With teams located throughout the United States, Europe, and Asia-Pacific, Glass Lewis offers customers global reach with a local perspective on important governance issues. With the support of Peloton Capital Management and Stephen, Glass Lewis can expand to new markets with new solutions while continuing its long-standing reputation of exceptional customer focus.

“Investors and public companies across the globe depend on research, insights, and technology from Glass Lewis to run their governance programs. With climate risk and deep social changes at the forefront of conversations across boardrooms, Glass Lewis’ solutions have never been more critical to sustainable business success,” said Steve Faraone, Managing Partner at Peloton Capital Management.

Lazard acted as financial advisor and Torys LLP was legal counsel to Ontario Teachers’ and AIMCo. Perkins Coie LLP acted as legal counsel to Peloton Capital Management and Stephen Smith. 

About Glass Lewis: 
Glass Lewis is the leading provider of independent global governance solutions. We enable institutional investors and publicly listed companies to make sustainable decisions based in research and data. We cover 30,000 meetings each year, across approximately 100 global markets. Our customers include the majority of the world’s largest pension plans, mutual funds, and asset managers who collectively manage over $40 trillion in assets. Our core solutions include Proxy Paper proxy research and Viewpoint proxy vote management platform. More information available at www.glasslewis.com.

About Peloton Capital Management: 

Peloton Capital Management is a private equity firm that utilizes a long-term investment philosophy and sector-focused strategy to partner with founders and management teams to help build exceptional businesses and create attractive returns for our investors. PCM’s primary focus is investing in services businesses within the Healthcare, Financial, and Consumer verticals in North America. Headquartered in Toronto, Canada, PCM was founded and is led by a team with extensive private equity experience. For more information please visit: www.pelotoncapitalmanagement.com.

About Stephen Smith:

Stephen Smith, one of Canada’s leading financial services entrepreneurs, is the Chairman, CEO and Co-founder of First National Financial Corporation, Canada’s largest non-bank mortgage lender with over $115 billion of mortgages under administration. He is the Chairman and a co-owner of Canada Guaranty Mortgage Insurance Company; Chairman and a co-owner of Duo Bank of Canada, formerly Walmart Canada Bank, whose subsidiary Fairstone Financial Inc., is Canada’s largest non-bank consumer finance lender; and is the largest shareholder in Equitable Bank, Canada’s Challenger Bank™. In 2015, Queen’s University announced the naming of the Stephen J.R. Smith School of Business at Queen’s University in honour of Mr. Smith and his historic $50 million donation to the school.

Recall, I wrote about Peloton's differentiated approach exactly two years ago when I did a brief stint at KPMG.

Basically, my boss knew Mike Murray, one of the founding principals at Peloton and asked me to cover their launch and I did because I found their approach interesting and they were two former OTPP managing directors who ventured off on their own.

Of course, it helps that they got the financial of Stephen Smith,one of Canada's most successful entrepreneurs. 

Anyway, I haven't spoken to Mike Murray or Steve Faraone since then but I'm happy their PE fund is on its fourth deal and the acquisition of Glass Lewis definitely fits well in their portfolio and in their long term approach.

Let's go back to the press release in 2013 when OTPP sold a 20% stake to AIMCo:

Ontario Teachers' Pension Plan (Teachers') today announced the sale of 20% of its ownership in proxy advisory firm Glass, Lewis & Co. (Glass Lewis) to Alberta Investment Management Corporation (AIMCo). Terms of the transaction are not being disclosed.

Teachers' acquired Glass Lewis in 2007 and the company operates independently as an indirect wholly-owned subsidiary.  No changes in the operations of Glass Lewis will result from the transaction.

"Glass Lewis has delivered strong revenue and client growth since Teachers' acquired the firm," said Wayne Kozun, Senior Vice-President, Public Equities, at Teachers'. "While we remain committed to maintaining a long-term stake in the company, we believe diversifying the firm's ownership with like-minded investors will bring valuable new perspectives to the next stages of Glass Lewis' development. We look forward to working with AIMCo, a longtime advocate for improved corporate governance, in supporting the positive role of independent proxy advisors."

"AIMCo is pleased to partner with Teachers' in the ownership of Glass Lewis and trusts in the long-term potential of the organization given the changing landscape of investor engagement," stated Leo de Bever, Chief Executive Officer, AIMCo.  "As an institutional investor responsible for the assets of 27 clients, upholding strong corporate governance is critical to our ability to add value; and Glass Lewis plays an important role in ensuring that integrity exists in the market for all investors."

"Teachers' stewardship of Glass Lewis over the past six years has been key to the success of our global expansion strategy," said Katherine Rabin, Chief Executive Officer, Glass Lewis. "We are very pleased about the diversification of ownership and the additional insight that AIMCo will contribute as we continue to bring to market important, independent engagement-support solutions."

OTPP bought Glass Lewis, the shareholder advisory firm, in 2007 from Xinhua Finance for $46 million:

The move comes just a few months after Xinhua - the Shanghai-based financial-information provider - bought Glass Lewis for $45m, a price that was considered steep at the time.

Shortly after that acquisition, two Glass Lewis executives, including the former chief accountant of the Securities and Exchange Commission, suddenly resigned.

The proxy firm subsequently lost several more employees and clients.

Fredy Bush, chief executive of Xinhua Finance, said in a statement on Friday: “While Glass Lewis has continued to build on its reputation as a leading provider of independent proxy research as part of Xinhua Finance, both companies agreed that its business could best thrive under independent ownership outside the public markets.

“We believe this transaction is in the best interests of both Xinhua Finance’s shareholders as well as Glass Lewis employees and clients.” The Ontario Teachers’ plan, which has $106bn under management, has become known for taking big stakes in companies, operating more like a private equity firm than a traditional equities and fixed income manager.

And since then, Glass Lewis has grown tremendously under the guidance of Teachers' Private Capital.

I wouldn't be surprised if Steve Faraone worked on that deal along with Jim Leech and he and Mike Murray know the company very well.

Although financial details weren't released, there's no way OTPP and AIMCo didn't make a killing on this deal. 

Last year, Deutsche Börse AG, Institutional Shareholder Services Inc. (ISS) and Genstar Capital LLC  announced that Deutsche Börse acquired a majority share of approximately 80% in ISS, valuing ISS at USD 2,275 million (EUR 1,925 million) for 100% of the business(cash and debt free). Genstar Capital and current management will continue to hold a stake of approximately 20%. The transaction is expected to close in the first half of 2021 subject to customary closing conditions and regulatory approvals.

Institutional Shareholder Services Inc. (ISS) is a lot bigger than Glass Lewis but they are the two most prominent proxy advisory services in North America. Because institutional investors sometimes hold hundreds or thousands of different stocks at a point in time, they tend to need assistance in voting their shares come annual meeting time. This is where ISS and Glass Lewis come in:

Both firms have created models of what they think good governance looks like. And both use various algorithms to determine whether a given company is deserving of a “yes” vote on Say on Pay, and whether individual board members should be supported. Many institutions follow their recommendations, while others subscribe to the services yet also employ their own staff to determine how they should vote their shares. The most interesting thing about these firms is that their business model requires them to change their guidelines on a regular basis. After all, if they had a straightforward set of rules and all companies adopted them, there would then be no need for ISS or Glass Lewis to exist.

As a result, both firms tend to move the goalposts on a regular basis, and this results in that most popular boardroom conversation: “What does ISS think about that?” This has also led to a homogenization of boardroom practices, as more and more companies come into compliance with the latest edict from ISS and/or Glass Lewis.  

There's no doubt about it, proxy advisory is big business, now more than ever with the advent of ESG, so I expect both these companies will grow over the next ten or twenty years and their new owners will make great returns.

Why did OTPP and AIMCo sell? Because they held on to Glass Lewis for a very long time and wanted to realize on their investment and move on to something else. It's that simple.

By the way, yesterday I read that Buffett's Berkshire opposes shareholders' climate change, diversity proposals:

Warren Buffett's Berkshire Hathaway Inc on Monday urged the rejection of shareholder proposals that annual reports be produced about its efforts to address climate change and promote diversity and inclusion.

The proposals were disclosed in Berkshire's annual proxy filing, ahead of the Omaha, Nebraska-based company's scheduled May 1 annual meeting.

Berkshire also said Buffett's compensation in 2020 totaled $380,328, comprising his usual $100,000 salary plus $280,328 for personal and home security.

Though Buffett's salary is low for a chief executive of a major company, his 16.2% stake in Berkshire was worth about $98.2 billion as of Friday.

Vice Chairmen Greg Abel and Ajit Jain, who respectively oversee Berkshire's non-insurance and insurance operations and whose pay Buffett sets, were each awarded $19 million, unchanged from 2019.

Berkshire's dozens of operating businesses include the BNSF railroad, Berkshire Hathaway Energy and Geico car insurer, and the smaller Brooks running shoes and Fruit of the Loom clothing.

Citing its decentralized model, Berkshire said the climate proposal from the California Public Employees' Retirement System, Federated Hermes and Caisse de Dépôt et Placement du Québec was unnecessary, and that many businesses' climate decisions already made "great sense" for the environment.

The company also cited its business model and Buffett's record of "opposing efforts, seen or unseen, to suppress diversity or religious inclusion" in opposing the proposal on diversity from As You Sow, a nonprofit shareholder advocate.

Berkshire said its businesses "represent dissimilar industries" operating around the world, and it was "unreasonable to ask for uniform, quantitative reporting" to compare them.

Buffett controls 32.1% of Berkshire's voting power, and shareholder proposals he opposes normally fail by big margins.

Berkshire's annual meeting will be in Los Angeles, allowing Vice Chairman Charlie Munger, 97, a Californian, to join Buffett in person to answer 3-1/2 hours of shareholder questions.

Looks like the Oracle of Omaha isn't on the same page as some of his big investors on these proposals but nobody is going to tell Buffett how to run his business.

Anyway, Stephen Smith isn't Warren Buffett but he's done very well for himself and he knows how to buy and transform companies. With the help of Steve Faraone and Mike Murray, they will grow Glass Lewis very nicely over the next decade, that I'm sure of.

You can read more about Peloton Capital Management here. If Steve Faraone has anything to add here, I'll be glad to edit my comment.

Below, Kern McPherson, Senior Director, North American Research at Glass Lewis, discusses the future of shareholder engagement from an analysts' perspective at the Engagement & Communication conference in New York (2018).

And Andrew Gebelin, Senior Director of Research, EMEA & Latin America at Glass Lewis, discusses the future of shareholder engagement in the U.K., Middle Eastern, and Latin American markets at the2018 Shareholder Engagement & Communication conference in London (2018).

Great insights, listen to their comments and know this, shareholder engagement is critical and it's only growing as large global investors incorporate ESG into all aspects of their investments.

Lendlease, a leading global real estate group, and Ivanhoé Cambridge, global real estate investor, are teaming up to develop a 1.15-acre project featuring a state-of-the-art life science building with world-class amenities, located at 60 Guest Street, a land parcel in the Boston Landing campus in Allston/Brighton, Massachusetts.    

“This project is further evidence of the strength of our integrated platform and end-to-end capabilities,” said Lendlease Americas CEO Denis Hickey. “60 Guest Street demonstrates our global strategic focus on delivering a diverse and robust pipeline of development projects alongside best-in-class capital partners like Ivanhoe Cambridge.”

“This life science development project is perfectly aligned with our investment strategy and vision, as we continue to invest in the life sciences sector which fosters long-term growth fundamentals,” said Nathalie Palladitcheff, President and Chief Executive Officer at Ivanhoé Cambridge. “Investing alongside Lendlease, who has a breadth of experience in constructing life science and research facilities, will allow both partners to grow their exposure in this sector.”          

60 Guest Street will contribute to Boston Landing’s diverse mix of uses and will strengthen Allston/Brighton’s emerging life science cluster. As one of the last sites to be developed as part of the master plan, the project will help complete the vision for Boston Landing as a transformative urban mixed-use environment in the Allston/Brighton neighborhood. Lendlease has seen firsthand the benefits of creating lively, people-centric, public destinations in Boston with Clippership Wharf, its climate-resilient mixed-use residential project on the East Boston waterfront.

“The city of Boston has always been a notable life science hub, with COVID-19 only highlighting the importance of the sector as the region’s newest growth engine,” said General Manager of Development for Lendlease Boston Nick Iselin. “This project is an important milestone for elevating Lendlease’s life science development capabilities in Boston and expanding on our existing life science construction experience in major markets across the U.S. We look forward to contributing an iconic project to the Allston /Brighton neighborhood with the delivery of 60 Guest and to enhancing an already dynamic mixed-use site from NB Development Group.”

“60 Guest Street will be a spectacular mixed-use, transit-oriented development strategically located within the Allston/Brighton neighborhood, with close proximity to Cambridge’s Kendall Square, the epicentre of the life science market in Greater Boston and across North America,” said Jonathan Pearce, Executive Vice President, Leasing and Development at Ivanhoé Cambridge. “This new life science building will offer exceptional and ultramodern amenities to cater to robust demand for specialized life science and research facilities in the Greater Boston area.”

60 Guest Street: a world class life science building

The proposed nine-story structure will comprise 320,000-square-feet of state-of-the-art office/lab space and a robust amenity program featuring a multi-purpose ground-floor and outdoor spaces at key locations throughout the building. Boston Landing is home to New Balance’s global headquarters, the Boston Celtics’ Auerbach Center and Bruins’ Warrior Ice Arena, as well as an indoor track and entertainment venue, lab/office and residential uses, and a planned 175-room hotel. The site attracted Lendlease with its easy transit access, a focus on health and wellbeing, and its burgeoning retail environment.

Lendlease’s experience in the life science sector is not new. The company’s Construction Management business has been involved in more than 350 life science and research facilities in the northeastern U.S., amounting to approximately 17 million-square-feet. Lendlease will apply that experience to 60 Guest, alongside Ivanhoe Cambridge, and will grow their exposure to this sector through additional investments and developments in life science ecosystems located in its gateway U.S. markets.

The Lendlease and Ivanhoe Cambridge partnership acquired the site from NB Development Group and will utilize the site’s prominent location adjacent to the Massachusetts Turnpike to offer a unique design expression that complements the diverse architectural language that has already been established at Boston Landing. The partnership has retained SGA Architects, a leading Boston-based life science firm to design the project.

The project will have an estimated $0.5 billion end value upon completion and the construction of the project is targeted to commence in June 2022.

This is a fantastic development project with a great partner, one that will really enhance Ivanhoé Cambridge's portfolio once it is completed.

Boston has always been a notable life science hub where you will literally find some of the best emerging biotech companies in the world.

Biotech is exploding. I should know, have been tracking the portfolios of top biotech funds for many years and trade/ invest in the sector, it's just incredible what is going on out there to treat all diseases and most (not all)  small biotech disruptive companies are based in Cambridge, Massachusetts (other is San Francisco, San Diego and elsewhere). 

Boston has two of the best universities in the world (Harvard and MIT) and obviously Harvard Medical School and Mass General, the #1 research hospital in America.

The entire healthcare ecosystem of Boston is second to none, it's literally the best city to develop a world-class life science project. You have dedicated top-notch researchers working at universities and in the private sector, a great teaching/ research hospital, great public transportation and a great quality of life.

I'm not laying it on thick, there's a reason why the top students from around the world are fiercely competing to study in Boston, it is an incredible life science hub which attracts the top minds from all over the world to work in academia and the private sector, all researching to find new treatments for rare and common diseases.

All this to say that Ivanhoé Cambridge was right to partner up with Lendlease to build this project as it will be one of many to come in a strategic and growing sector of the economy.

By the way, Ivanhoé Cambridge isn't the only real estate outfit targeting life sciences assets.

Recall, OMERS' Oxford Properties also recently invested $985M in 4 US life sciences assets:

Oxford Properties Group has acquired four life sciences properties plus developable land in the Boston and San Francisco areas for $350 million (all figures Cdn). It also plans to develop an additional $635 million worth of medical laboratory space at the Bay Area property.

The acquisitions and development plans are part of Oxford’s strategy to become a larger player in the life sciences sector, which it sees benefiting from emerging trends in the convergence of technology and science.

Oxford has been building up both assets and a bank of development land in the sector since 2017. It has also been engaged in the life sciences sector through its credit business.

The San Francisco-area asset is the Public Market Emeryville, acquired in partnership with City Center Realty Partners, a San Francisco-based real estate developer and investor.

The 148,000-square-foot mixed-use property comprises lab space, retail, food and offices within the established life sciences cluster of Emeryville.

The investment includes 36,000 square feet of ground-floor, first-generation lab space, a food hall and approximately 60,000 square feet of office and retail space which Oxford intends to convert to lab space.

The deal also features land parcels Oxford plans to develop into purpose-built lab product in a market with almost zero availability for such space.

Life sciences a priority for Oxford Property Group

“Growing a meaningfully sized life sciences business represents one of our highest-conviction investment strategies and top priorities across our business,” said Chad Remis, executive vice-president, North America at Oxford Properties, in the announcement.

“These transactions grow our presence in two key global life sciences markets and complement our existing portfolio of assets and significant development pipeline in the sector.

“It gives us a solid foundation to continue to grow from as we seek to scale this part of Oxford’s business in 2021.”

City Centre had also been part of the previous ownership joint venture.

“City Center looks forward to our collaboration with Oxford on this project and continuing our successful transformation of Public Market Emeryville from a suburban-style collection of buildings and surface parking lots into a premium mixed-use life science campus in the East Bay,” said Mark Stefan, City Centre’s president and co-founder, in the release.

Three Boston-area properties

Oxford also acquired three assets in the Boston area:

– 33 New York Ave. is a core, recently completed 114,000-square-foot state-of-the-art bio-manufacturing facility 100 per cent leased to Replimune Group Inc. and CRISPR Therapeutics.

– 1 and 5 Mountain Rd. are two adjacent buildings that comprise 153,000 square feet and are currently leased to Sanofi. Oxford has identified significant value-add opportunities for 1 and 5 Mountain Rd.

Oxford’s push into life sciences in North America will initially focus on Boston, the San Francisco Bay Area, San Diego, and other emerging locations, the company said. Beyond North America, Oxford is also reviewing opportunities across Europe as it seeks increased global exposure to the asset class.

“Growth in this asset class is being driven by a number of tailwinds. Aging populations are a demographic engine; however, the need for new treatments, diagnostics and equipment goes beyond that trend alone,” Remis explained in the announcement.

“Technology and science are converging with advances in data analytics and AI that is accelerating life-changing innovations across biotech, pharmaceuticals, nutrition and medical devices.

“As a result of this shift, private equity and venture capital funding for promising products and companies has markedly increased in recent years. This surge of activity and the formation of new and growing companies is taking place against the backdrop of a limited supply of lab infrastructure in the sector’s key global markets.”

About Oxford, City Centre Realty Partners

Established in 1960, Oxford Properties Group manages approximately $60 billion of assets across the globe on behalf of its co-owners and investment partners.

Oxford’s portfolio encompasses office, retail, industrial, hotels and multifamily residential and spans more than 100 million square feet across four continents. It invests in properties, portfolios, development sites, debt, securities and platform opportunities across the risk-reward spectrum.

While its global headquarters is in Toronto, Oxford operates out of over 15 regional offices including New York, London, Luxembourg, Singapore and Sydney. Oxford is owned by OMERS, the defined benefit pension plan for Ontario’s municipal employees.

City Center Realty Partners, LLC (CCRP) is a San Francisco-based real estate investment firm specializing in the development, redevelopment and acquisition of urban real estate. Across the United States, CCRP has developed and acquired more than $1 billion of retail, office and mixed-use properties.

Of course, Boston isn't just a life science hub, it's a premiere tech hub which is why PSP invested in a lease deal with Amazon there.

Lastly, a quick note on the performance of Ivanhoé Cambridge and Oxford Properties last year as both real estate subsidiaries took some massive writedowns on non-performing assets and experienced significant losses.

The pandemic hit the world and many assets got hit hard. We are moving quickly to vaccinate the population (make sure you get vaccinated), we will recover from this and both these real estate subsidiaries will come back very strong over the next five to ten years.

Their strategic orientation is changing, their portfolios are becoming more resilient, more diversified across sectors and geographies, they will bounce back strong.

I'm not just saying this, I firmly believe it and it's really important to focus on the long run when looking at the returns of pensions, especially the returns of private markets which do not immediately enjoy the liquidity tsunami the Fed and other central banks unleashed to prop up public market assets.

I'm getting a little tired and irritated with Monday morning quarterbacks who don't have a clue about pensions and real estate and private equity stating their critical opinions publicly. 

Again, the pandemic hit some pensions and their assets harder than others, please stop comparing them and stop jumping to conclusions. 

I have full confidence in Nathalie Palladitcheff, CEO of Ivanhoé Cambridge and Michael Turner, CEO of Oxford Properties, and their respective senior managers. These are world-class real estate outfits.

Last year was a very tough year, they know this well, but it's time we all turn the page and start looking ahead. 

No matter what happens in a post-pandemic world, real estate will remain a critically important asset class at all of Canada's large pensions.

We need to trust the professionals managing these assets, they know what they're doing and they've weathered a few storms in their careers.

Alright, let me wrap it up there.

Below, one of Brighton's many changes; in place of old stock yards: Boston Landing, a 15-acre site marked by New Balance's eye-catching headquarters (2018). 

Nice clip, shows you how this location has been transformed and how it's growing fast and why this new project Ivanhoé Cambridge and Lendlease are developing will be a long-term success.

• For institutional investors, the path to net zero is not straightforward – but it is navigable.
• Earning both financial and environmental returns can be done, but it requires commitment, creativity and trade-offs.
• Here are 3 central questions investment managers should consider as they make this journey.

Now, more than ever, investors have a dual responsibility to earn returns and make the world a better place.

At Ontario Teachers’ Pension Plan, we look after the retirement security of 329,000 teachers and this investing philosophy guides our thinking every day. We are one of the world’s largest pension plans and this scale means we can influence and effect real change in the world.

That is why we recently set a target to achieve net-zero emissions by 2050. As an allocator of capital, a builder of businesses and an active, engaged owner, we have a responsibility to maximize the impact of our net-zero journey.

The challenge is balance – balancing our broader responsibility to the world while delivering on our fiduciary duty to look after every one of our teachers. 

Striking this balance is not easy for us, or for any other investor. In fact, there is no straight path towards net zero. Instead it is a winding road requiring commitment, creativity, and often, difficult trade-offs.

For me, this issue revolves around three central questions.

1. To engage or divest?

Investors are often askedif they will immediately divest holdings in companies that do not support the transition to net zero. I understand that instinct. And the fact is, it is easy to divest. But divestment does not fix the problem, it just passes it onto someone else.

At Ontario Teachers’, we support engagement over divestment. We believe in working with our partners to solve problems and build better, more sustainable businesses.

For investors this means working with companies they invest in to support their journey to net zero: from measuring emissions and setting reduction targets to developing transition plans and delivering on them. It means acknowledging that not everyone is starting their sustainability journey from the same place. Fossil fuels, for example, are much more deeply embedded in the fabric of some economies than others and therefore decarbonization is much harder.

We must deal with these realities as they are, not how we would like them to be.

The move towards net zero is particularly challenging for companies that extract, sell or transport fossil fuels. A transition away from these businesses is underway, but they will remain an essential part of the global economy for years to come. Engagement gives investors the chance to work together to achieve a fair transition.

Fundamentally, we believe it is better to retain a seat at the table than to walk away and hope others will do what is required.

2. Save the planet or generate returns?

For investors, the climate debate is often framed as a choice between climate action or returns; in other words, returns will suffer if you back sustainable businesses. Yet this is not a binary choice.

The transition to net zero creates major new investment opportunities – from the electrification of vehicles and carbon capture technologies to renewable energy and sustainable infrastructure.

It also creates risk. What makes a good investment today may not be the case tomorrow. Consumer preferences and government regulation are increasingly rewarding companies with more sustainable business models. This trend will continue to accelerate in the coming years.

Ultimately, institutional investors need to work alongside their portfolio companies, fulfilling their stewardship role by investing in solutions that contribute to a low-carbon future and delivering stable, long-term returns. 

3. Who are the key partners on this journey?

Global investors cannot do this alone. There are many credible pathways to a net-zero future, but every path requires increased policy action from governments and regulatory bodies worldwide.

Only governments can create a predictable and stable regulatory environment that encourages and supports investors to take big bets on decarbonization. We need public policy that incentivises investors to take the right kinds of risks and we need a clear set of standards to properly measure and assess progress toward the net-zero goal. This is essential to the successful delivery of the net-zero transition.

The journey also requires strong partners. Partners who share a common vision, set of values and long-term outlook. Partners who are committed to working together to build businesses with lasting value.

Underpinning all of this is technology. New technologies and operating models are necessary to support the transition, but many are not yet at scale. Investors need to be there to support and, where possible, accelerate their development, guided by a clear, focused strategy for the long term.

All of this requires conviction and a resolve to make the tough decisions. The opportunities presented by the net-zero transition are immense, but so are the challenges. Working together, we can overcome these challenges, and do our part to secure the planet’s future. 

Hall of Fame analyst François Trahan is at it again.

After going underground for the last six months, Trahan, who turns 52 Sunday, on Friday announced the launch of Trahan Macro Research. In other words, he’s back in the macro strategy game full force.

Trahan was elevated to the All-America Research Team Hall of Fame in 2016 after winning the No.1 position for portfolio strategy in 10 out of the previous 11 years. Late of UBS, where he made a career pit stop as managing director of U.S. portfolio strategy from 2019 to 2020, Trahan was the co-founder of International Strategy & Investment Group spinoff Cornerstone Macro, co-founder of Wolfe Trahan, and executive managing director, chief investment strategist, and head of quantitative research at ISI.

His new boutique research firm at present has six employees and is in full hiring mode, according to Trahan, who said he is planning to scale up fast in the next few months.

“We are here to help investors navigate a profitable path forward in these turbulent times,” Trahan said in an interview. “Our collective talent and experience at combining macro and micro together will give a new and broad context to our work.”

He cited prioritization of in-depth research and meaningful exchanges with clients as the firm’s signature path forward. For now, the plan is to offer open research access to all. 

Trahan, who hails from Montreal, began his career at BCA Research. He is a longtime acolyte of Evercore ISI chairman (and fellow Hall of Famer) Ed Hyman, to whom Trahan has previously credited his success and his reductionist philosophy of streamlining complex macro concepts to the simplest, easiest form possible — an approach he said he will continue to adhere to in this latest endeavor.

It's Friday, time to focus my attention on markets and what a crazy week it's been. 

This week, I will start with great insights from François Trahan, one of the very best strategists/ analysts out there.

Full disclosure, François is a friend so I'm openly biased and shamelessly plugging his new research outfit which has Katherine Krantz as its CEO, another former BCAer and super smart lady. 

Before I begin, please enter your email at Trahan Macro Research here and start receiving their research which is free for now. 

Also, on the website, you will read this:

We are thrilled to announce the launch of Trahan Macro Research. After six months of hard work setting up the new firm, Francois and his team are back and focused on the macro backdrop once again. 

The events of 2020 have left us with a macro puzzle that will take time to solve. Truth be told, the broader context for stock picking probably matters more today than ever before. 

As a boutique firm, we choose to prioritize in-depth research and meaningful exchanges with clients and sincerely hope to help investors navigate the most profitable path forward.Our plan for now is to open research access to everyone. Simply fill out the form on this page to receive our work regularly. 

 Francois & Team

What I like about François is he understands macro extremely well and uses his understanding to then delve deeper into recommending sectors and industries.

He's not a trader, he's a top ranked analyst/ strategist and economist who makes great top down sector/ industry calls based on proprietary and readily available economic/ market indicators. 

His research is read by the very best institutional funds in the world, and that includes elite hedge funds, so consider yourself lucky he has decided to give everyone access to it for now.

Anyway, you can read the latest research comment on why we are in the fourth inning of a cyclical leadership by clicking here.

He begins by stating this: 

According to François, the yield curve is the best Anticipatory Economic Indicator (AEI) for timing the peak in the Leading Economic Indicators (LEI) and it suggests that this peak is unlikely to materialize until 2022.

 And policy remains supportive of further growth:

Interestingly, he notes the last time investors faced a similar set of interest rates/ PMI conditions was in March 2017.

Just like today, back in March of 2017, consensus was very concerned about inflation and he states inflationary pressures only intensified over the course of the year as PMIs continued to trend higher. 

What I find interesting is right above that chart, François Trahan states: "We believe that today investors should fear an easing cycle, not a tightening cycle, at least not in the near-term."

Wow! It seems like the world is scared of a tightening cycle or that the Fed is "behind the inflation" curve but right in that paragraph, Trahan is telling you to worry about another easing cycle.

This is something I wish he had expanded on but he didn't, maybe in a future comment he will.

Anyway, in terms of sectors and industries, Cyclicals (Risk-On segments) led and continued to lead thereafter, outperforming Defensives (Risk-Aversion trade) and while Risk-Off (Growth) basically performed in line with the S&P 500:

And most of the strong performance back in March 2017 was concentrated in Banks, Semiconductors and Transportation and these sectors continued to outperform through the end of the year.

The main lesson from March 2017 is stick with your winners this year as they're likely to outperform going into year-end as economic data improves:

Once again, please take the time to read the entire research comment here because I am covering the main points, you will learn a lot more reading the entire comment thoroughly.

Also, enter your email at Trahan Macro Research here and start receiving their research which is free for now. 

So, are we going to see a redux of March 2017? Are cyclicals going to continue leading the rally going into year-end.

That's what it looks like but let me caution my readers some big cyclical stocks look quite extended here and others don't so you need to be careful with some winners and expect a nice pullback here, especially if the backup in yields subsides or even stalls.

For example, Financials (XLF), especially banks (KBE) and regional banks (KRE) bounced big on Thursday after the Fed meeting as the 10-year hit 1.74% and the curve steepened but gave up their gains from the highs and they seem very extended here:

I can say the same thing about Industrials (XLI) and Materials (XME), both on fire over the past year:

And then there's Energy (XLE) which has performed very well since the start of Q4 but seems to be stalling here:

Clearly, some cyclicals look better than others but there are some macro factors in the background that can play on cyclicals here:

• Have long bond yields peaked here? They seem to have overshot in the near term if you ask me but yes, they will likely rise up to 2% at the end of the year as the US economy continues to recover.
• On that point, I see the US economy gaining over Europe and other regions mostly because the vaccine rollout is going very well down south with 30% of the population now vaccinated (still not herd immunity but a lot better than many OECD countries).
• I see the US dollar coming back here and surprising a lot of people. I also expect all those shorting bonds now betting on inflation are going to be very surprised next year when it subsides.

Have a look at the TLT and UUP here:

The rout in long bonds is a bit overdone now and the US dollar has bottomed and is coming back lately.

Investors are all thinking the same thing: should we take profits on some of these cyclicals now that they rallied so much?

Put another way, do you buy shares of Goldman Sachs (GS), Caterpillar (CAT) and Deere (DE) here after a spectacular run-up, and there are plenty more that have had huge gains over the past year.

Maybe you stick with some winners but take some profits on others and wait for a nice pullback or look elsewhere.

Anyway, I can't get into all my thinking here but unlike François, I feel like the rally in some cyclicals is already in the eight or ninth inning and it will be very bumpy going forward.

Still, there's no doubt the US economy is recovering nicely and they will likely end the year up, outperforming other sectors, but what happens in the rest of the three quarters will be critical because I suspect a lot of trading/ rebalancing and rotation will be going on at the end of each quarter.

And if yields do decline or just stop rising precipitously, I expect Tech (XLK) will come back but the way the Nasdaq, Apple and many other shares that I track are trading, it looks very muted here and it remains to be seen if tech stocks can break from their current slump (they look toppish here):

All this to say, while it looks a lot like March 2017, these markets are a lot more fickle and volatile and you need to be prepared for big corrections in all sectors.

But so far, it looks like François is right, just stick with the winners going into year-end, but don't be surprised if there will be a few major corrections along the way.

Alright, I am tired, spent a week glued on markets, absolutely insane action in some stocks this week, I need a break.

I wish you all a great weekend, stop fretting over inflation, the bond market, the Fed and yield curve control (YCC). A lot of what you saw this week is a total overreaction, much ado about nothing.

Below, CNBC's Bob Pisani takes a look at the market right after the open today and how markets performed this week. Listen carefully to his comments, I agree with him, as more and more retails and institutional traders dominate these markets, change is happening really fast.

As the onset of the COVID-19 pandemic sent markets crashing last March, board members of the Alberta Investment Management Corporation realized they had a problem on their hands.

A Crown corporation that manages nearly $120 billion in assets for pension, endowment and government funds, AIMCo had been pursuing a derivative strategy known as VOLTS that aimed to earn premiums from bets on volatility across multiple global equity markets.

It was one of dozens of “value-added” strategies managed internally by AIMCo’s public equities team, but when markets went haywire with a level of volatility last seen on 1987’s Black Monday, the risky strategy quickly magnified losses.

The board approved a decision to wind down the trades and lock in a $2.1-billion loss to avoid further carnage. It was an embarrassing failure of risk management for a fund that size — the loss erased about one-sixth of the investment returns generated by AIMCo for all of 2019 — and sparked questions of oversight, risk-taking and most of all trust with the more than 30 client organizations that park their money there.

“There’s no doubt that the VOLTS situation shook that relationship,” AIMCo board chair Mark Wiseman said in a recent exclusive interview with the Financial Post. “Our job is to regain the confidence of the clients in that relationship and I think it’s something we have to invest very heavily in.”

Wiseman, who was appointed to lead the board in July, after a review of the VOLTS fiasco landed, knows there is still a lot of work to be done and that the stakes are high: Alberta Premier Jason Kenney is actively considering withdrawing Albertans from the national Canada Pension Plan and to divert the savings to AIMCo, something that would boost its significance in the province.

Wiseman would not comment on the CPP decision, expected this spring, but he said AIMCo’s unique set-up requires a strong partnership with all clients, which range from the pension plans for Alberta judges, teachers, government, and university employees, to the province’s Heritage Savings Trust.

“It only works well when there’s a high degree of trust and collaboration between the client and the asset manager,” Wiseman said, in part because AIMCo works with each to determine an optimal asset mix given their obligations and risk tolerance, before investing accordingly.

Unlike other types of money management, however, most AIMCo clients can’t just take their money elsewhere if they are unhappy, a point made clear last year when Kenney’s United Conservative Party unilaterally moved a number of public sector investment plans including the Alberta Teachers Retirement Fund under AIMCo management.

“In most cases they can’t (opt out),” Wiseman said. “The rules are different (for each client), but for the most part they cannot, and that puts, in my view, a tremendous amount of responsibility on AIMCo to communicate, to be transparent, to be collaborative and to invest heavily in that relationship with our clients.”

Under Wiseman, a search is underway for a new CEO after current CEO Kevin Uebelein announced he would depart by June, before his contract expires.

In addition, a new position has been created to manage client needs and report directly to the CEO.

Another step taken in the wake of the volatility losses is the formation of a four-member “enterprise” risk committee, created last month to monitor and manage risks to the organization that are not strictly financial — including reputation. Wiseman is also a member as a result of his role as chair of the Crown corporation.

“That (committee) will be charged with overseeing the governance of enterprise risk for the institution — everything from operating risk, (to) reputation risk, (to) systems risk,” he said, adding that these were monitored but not in a coordinated or consolidated way. “We’ve just put it into a single committee, so it doesn’t get lost.”

Keith Ambachtsheer, a veteran pension consultant, said that with AIMCo at such a critical juncture, someone with Wiseman’s experience was a necessity to manage a range of governance, investing and political concerns.

At 51, Wiseman has been in the senior ranks of large institutional asset managers including the Ontario Teachers’ Pension Plan Board and New York-based Blackrock Inc.

He also spent four years at the helm of the Canada Pension Plan Investment Board, the country’s largest pension management organization — and, like AIMCo, a Crown corporation that operates at arms-length from government. That experience from 2012 until 2016 will undoubtedly help AIMCo should Kenney decide to extract Albertans’ share of CPP and create a home-grown version managed by the provincial asset manager.

While Wiseman’s career has not been without controversy — he joined AIMCo six months after stepping down from his position at Blackrock, the world’s largest asset manager, after failing to disclose he was in a relationship with a colleague as required by company policy — his investment management credentials may be unmatched in Canada.

“He will have strong views on what AIMCo needs to do to regain the trust of its clients,” Ambachtsheer said, adding that Wiseman would also be a good resource to help determine what attributes are needed in the Alberta asset manager’s next CEO.

Malcolm Hamilton, an actuary and former partner at pension consultant Mercer who specialized in the design and funding of public and private pension plans, said he expects AIMCo will ultimately recover from the damage done by the volatility strategy.

“One bad year or one bad mistake is never fatal for a public sector pension plan,” Hamilton said. “You acknowledge your mistake, learn from it … then you move on.”

But not everyone is happy.

A private members’ bill introduced by Alberta’s NDP finance critic in December sought to get AIMCo clients a seat at the boardroom table, and better access to the investment manager’s governance and how investment decisions are made.

Defeated along party lines at the committee stage last week, the bill sought to boost the 11-member board to 15, with four representatives from AIMCo’s public sector clients. A statement posted by the NDP Caucus said another purpose of the bill was to remove the ability of the province’s finance minister to issue investment directives to AIMCo.

And that is only part of a far-more politically charged environment Wiseman finds himself in.

There is also discontent at the Alberta Federation of Labour, which has accused the UCP government of beefing up AIMCo with funds — from the pensions pushed under its umbrella to the potential standalone Alberta replacement for CPP — with the intent of pressuring the investment manager to prop up the oil-and-gas industry as global investors turn to more environmentally friendly alternatives.

Wiseman acknowledged that investment managers benefit from size and scale, but he said AIMCo already has those attributes as one of Canada’s largest institutional investment managers.

“My view for AIMCo is that very simply, Albertans — regardless of what assets are managed by AIMCo, whether that’s expanded or not — deserve a world class public asset manager for the province that can benefit from all the scale and scope benefits that are set forth in the Canadian model,” he said.

A large part of that model, established at institutional investment managers such as CPPIB and the Ontario Teachers’ Pension Plan, is independent governance, meaning decisions are free from political interference and left entirely to the board, he said.

AIMCo’s relationship with Alberta’s government, too, has been established at arms-length, and while the terms could be tweaked to reinforce independence — not just arms-length but “orangutan arms” as Wiseman put it — the investment manager has made all decisions independently since he joined the board.

That includes implementing “changes to the culture” and other recommendations called for by outside experts that assessed what went wrong with the VOLTS volatility strategy that was first undertaken in 2013 and got increasingly risky after 2018, with a “legacy” risk-management system that didn’t spot the problem until it was too late.

“I can tell you unequivocally, in my eight months as chair, there has been zero interference, attempt of interference at my level, or as far as I know at the level of management at AIMCo,” Wiseman said. “And more to the point, I believe the government of Alberta is fully aligned with the Canadian model…. That’s what they’ve asked me to help them do.”

He said the independent governance model is a big factor in the investment returns generated by Canada’s large pension funds, which remain among the top-10 in global rankings such as the 2020 Mercer CFA Institute Global Pension Index.

It is so important to him that Wiseman pledged to leave AIMCo if the government ever abandons the arms-length relationship with the asset manager.

“If it’s no longer the case, I won’t be chair of the board,” he’s said, “because, very simply, I believe in strong, independent public asset management.”

Wiseman said decisions around oil and gas and the energy transition to a lower carbon economy will likewise be made based on investment potential rather than politics, and he sees a “massive investment opportunity” in alternative energy.

“I actually think AIMCo can play, potentially, a really, really unique role because physically of where we sit… in terms of the information flow about these topics,” he said.

“Some of the best technology, some of the best innovation, some of the best thinking in the world, obviously as they relate to energy in particular, are coming out of Alberta.”

He said he believes the organizations whose money AIMCo manages, for the most part, also recognize there is a “home-field” advantage over institutional investors outside the province and the country when it comes to the energy transition.

“I think the clients are laser focused on being a fiduciary to their beneficiaries,” he said. “That decision is being made purely from an investment point of view, not a political point of view.”

Great interview with Mark Wiseman, AIMCo's Chair, on the organization's next move.

Let me begin by stating I agree with pretty much everything Mark states in this article.

One little caveat, however, on this whole VOLTS fiasco.

A year after markets plunged and volatility spiked, markets have mended significantly and the Wall Street VIX 'fear gauge'has slipped to fresh pandemic lows:

The Cboe Volatility Index, known as Wall Street's "fear gauge," slipped to a fresh COVID-19 pandemic low on Tuesday, as U.S. stocks soared to new highs on expectations that fiscal stimulus and signs of progress in a countrywide vaccination drive will spur a broader economic rebound.

The VIX was recently down 0.54 points at 19.49, its lowest since Feb. 21, 2020, days before the World Health Organization declared the coronavirus outbreak a global pandemic.

A pandemic-fueled tumble that shaved about a third of the value off the S&P 500 last March pushed the VIX index to a near-record high of 85.47, a level it only topped during the global financial crisis.

The index has retreated since then, as the S&P 500 rallied 80% from its March lows to hit a fresh high on Tuesday, led by technology stocks.

Investor appear to have become more optimistic over the pandemic’s trajectory in recent weeks, as a vaccine rollout in the U.S. expands. The United States has administered 110,737,856 doses of COVID-19 vaccines and distributed 142,918,525 doses in the country as of Tuesday morning, according to the U.S. Centers for Disease Control and Prevention.

Fund managers in a monthly survey from BofA Global for the first time in a year did not name COVID-19 as the market’s top “tail risk,” citing inflation instead.

Still, the VIX remains above the 15.4 average seen for 2019.

And volatility futures expiring further out in time still remain relatively elevated, a sign that some investors continue to maintain a cautious stance.

"The coronavirus volatility spike is still lingering in investor’s memories," Susquehanna International Group’s Chris Murphy said in a note. "Although near term volatility has decreased, the scars from Covid likely leave investors hesitant to bring down medium and longer term volatility. We saw something very similar after the great financial crisis," Murphy said.

That article was last week, on Monday long bond yields dropped and the VIX declined below 20 after a volatile week last week:

Looking at the above, it makes you wonder what if AIMCo didn't pull the plug on VOLTS when it did? What if they held on a little longer to allow fiscal and monetary policy to work its magic?

Well, if they weren't outed by their clients and held out longer, then they would have looked like heroes, Peter Pontikes and David Triska would still be there, Kevin Uebelein wouldn't have had to resign, and Dale MacMaster and his public markets team would have remained intact.

Of course, hindsight is 20/20 but my point is you really need to take the long view in both private and public markets and trust the judgment of your senior investment staff managing your assets.

I'm not saying they were wrong in closing VOLTS and wrapping it up because there were obvious risk management issues that were never appropriately addressed, but you see how luck plays an important part in managing assets.

If you get the timing wrong or if something blows up right before you report, you're basically screwed as every Monday morning quarterback will crawl under their rock to criticize you for your lack of fiduciary duty (isn't it also a lack of fiduciary duty when you miss big gains? How much money would VOLTS had made if they didn't shut it down? We will never find out).

Anyway, enough about VOLTS, it's over, it's done with, let me move to Mark Wiseman's comments above.

Keith Ambachtsheer, a veteran pension consultant, said that with AIMCo at such a critical juncture, someone with Wiseman’s experience was a necessity to manage a range of governance, investing and political concerns.

I agree, Mark has seen it all, he formerly led the country's largest pension fund and then moved on to BlackRock where he served as Global Head of Active Equities and helped them set up their long term private capital group (LTPC).

He left BlackRock under difficult circumstances but assumed full responsibility for failing to disclose a 'consensual relationship' and has turned the page.

Last June, Mark was appointed the Chair of AIMCo in a move largely seen by most industry observers as a move to bolster confidence in Alberta's largest and most important pension fund.

Perhaps the biggest step taken in the wake of the volatility losses is the formation of a four-member “enterprise” risk committee, created last month to monitor and manage risks to the organization that are not strictly financial — including reputation. Mark Wiseman is also a member as a result of his role as chair of the Crown corporation.

“That (committee) will be charged with overseeing the governance of enterprise risk for the institution — everything from operating risk, (to) reputation risk, (to) systems risk,” he said, adding that these were monitored but not in a coordinated or consolidated way. “We’ve just put it into a single committee, so it doesn’t get lost.”

I not only agree with the creation/ purpose of this committee, I think it's a critical part of AIMCo now and I would encourage every major Canadian pension to create a similar committee if they have not already done so.

Large Canadian pensions are basically large conglomerates with many business lines, you need a committee to help oversee all risks, not just investment risks, but also reputation, operational and systems risks.

Now, I also agree with Malcolm Hamilton, an actuary and former partner at pension consultant Mercer who said he expects AIMCo will ultimately recover from the damage done by the volatility strategy.

“One bad year or one bad mistake is never fatal for a public sector pension plan,” Hamilton said. “You acknowledge your mistake, learn from it … then you move on.”

AIMCo has already moved on,  but it seems like some of its clients haven't and this includes its new clients, Alberta's teachers. 

The CBC recently reported that Alberta Teachers' Association and an Edmonton school principal have filed a lawsuit against the provincial government about an order they say wrests more control of pension funds away from teachers:

The association, and Greg Meeker, who was president of the Alberta Teachers' Retirement Fund (ATRF) for 10 years, claim a December ministerial order conflicts with the law. They say it also contradicts public statements by Finance Minister Travis Toews, who said current and retired teachers would retain control of how their pension fund is invested.

"[Teachers and the government] should both be interested in the best, cost-effective investment return possible," Meeker said on Friday. "But that does not seem to be the case. And it seems to be that one of those two parties is making some arbitrary decisions about how that's going to roll out for the next 40 or 50 years."

At issue is control of the $19.3-billion teachers retirement fund, which has nearly 84,000 members.

In 2019, thousands of teachers were outraged when the United Conservative Party government passed a bill requiring the ATRF to use the Crown corporation Alberta Investment Management Corporation (AIMCo) to manage investment of the fund.

The government, which pays about half of teachers' pension contributions, said the move would save investment management fees. Toews has said that ATRF would retain ownership of the fund and keep its ability to decide the strategy of how the billions of dollars should be invested.

The $19 billion is gradually being transferred to AIMCo's control, and that transfer is supposed to be complete by the end of 2021. But to complete that transfer, the teachers' pension fund board and AIMCo have to reach an investment management agreement.

When those talks stalled last fall, the government passed a ministerial order, which took effect in January. It allows AIMCo to veto the teachers' fund investment directions in some cases, and says AIMCo will be the arbiter of any disputes between the parties.

In January, a government spokesperson said the order was intended to be temporary until AIMCo and the ATRF could reach an agreement. They said none of the changes affect the benefits paid to retired teachers.

The ATA and Meeker allege it contradicts the Teachers Pension Plan Act and public statements by Toews.

AIMCo's decisions have been under additional scrutiny since a risky investment strategy cost its clients $2.1 billion last year. The shakeup prompted an external review and turnover of senior leaders.

Meeker said if AIMCo underperforms while investing public-sector pensions, younger teachers and the government will face rising contributions to prop up the plan.

"If we get solely betrothed with an investment manager that doesn't perform as advertised, that could be a real problem for costs," he said.

Toews's press secretary, Charlotte Taillon, said Friday the government cannot comment on the legal action.

"We are confident that ATRF and AIMCo will be able to come to an agreement," she said in an email. "Once the parties agree to a final investment management agreement the Ministerial Order will no longer be in effect."

I completely disagree with Greg Meeker and the Alberta Teachers' Association on this issue, I honestly think they don't have a clue of how lucky they are AIMCo is now managing their assets and the sooner they move on from this, the better off they will be (ATRF will be amalgamated into AIMCo, it's a done deal).

Greg Meeker is stirring up a hornet's nest. For what? I don't know.

All I know is Mark Wiseman is the Chair of AIMCo and they are moving on, with or without the blessings of Meeker and other critics (preferably with but they need to focus on their mandate).

Importantly, AIMCo has top-notch governance (see here and here), scale and is diversified across public and private markets internationally and has important advantages over ATRF because of its size and clout.

And if it's one thing Mark Wiseman holds dear, it's the governance at the center of the Canada pension model. He rightly thinks others can learn a lot from this model. 

What else? I'm on record stating that Alberta shouldn't opt out of the Canada Pension Plan, it's a totally bonehead move that will cost the province significantly over the long run.

These are my opinions, not Mark Wiseman's, so please do not ascribe my views to him.

Lastly, the search for AIMCo's next CEO continues.

As I've stated, there's no doubt André Bourbonnais, PSP's former CEO and close friend of Mark Wiseman's made the short list.

Now we can also add Mark Machin to the list after his abrupt departure from CPP Investments although I doubt Mark (Machin) will warm up to Edmonton and I have a feeling he is being solicited by every major executive recruiting firm on the planet right now (Mark is the best, guys like that are highly recruited continuously).

And that leaves my top pick to run AIMCo, Mark Wiseman himself.

He's been the Chair of the Board for eight months, knows the organization very well, and he can easily take over at the top spot and run it over the next five or ten years.  

I honestly can't think of a better person to succeed Kevin Uebelein who I think did a great job leading this organization since he took over (never mind VOLTS, like I said, if they held on longer, it would have been a different story).

Below, Mark Wiseman, chair of AIMCo talks about "an emerging retirement income crisis" thanks to record low interest rates and decreased economic activity as a result of the pandemic. He talks about what can be done to ensure the strength and success of the Canadian pension model in this environment and how we can grow the economy. Click here to view it if it doesn't load below. 

• The platform, backed by founding investors CDPQ and Ontario Teachers’, will continue to seek out high-quality acquisitions, demutualizations and other opportunities in the property and casualty (P&C) and life insurance sector.

Constellation Insurance Holdings, Inc. (Constellation), backed by institutional investors Caisse de dépôt et placement du Québec (CDPQ) and Ontario Teachers’ Pension Plan Board (Ontario Teachers’), announced today it has entered into an agreement for its inaugural transaction through the acquisition of Cincinnati-based Ohio National Mutual Holdings, Inc. (ONMH) and its wholly owned subsidiary Ohio National Financial Services, Inc. (collectively, Ohio National) for a total consideration of US$1 billion, which includes both member consideration and new capital infused in the business, as part of its demutualization process.

Established in 1909, Ohio National is a leading provider of financial products and services that helps its policyholders achieve financial security and independence. It has a network of financial professionals operating across 49 states and, as of December 31, 2020, its affiliated companies have US$41.2 billion in assets under management.

Today’s announcement marks an important first step for Constellation, as we deliver on our strategy to provide North American stock and mutual insurers access to long-term growth capital, enhanced ratings, scale efficiencies and aligned equity incentives, while preserving the independence, brand, existing operations and culture for which they are recognized,” affirmed Anurag Chandra, Founder, Chairman & CEO of Constellation. “We welcome CDPQ and Ontario Teachers’ upsized long-term capital commitment to continue to expand the platform in North America.”

“Constellation is a uniquely positioned platform, combining long-term capital and deep industry experience to offer differentiated solutions in an increasingly consolidated market. By working closely with Constellation since our initial investment and expanding our commitment alongside a trusted investment partner, Ontario Teachers’, we aim to support insurers who are navigating a complex environment, such as Ohio National, as they embark upon the next phase of their growth,” stated Martin Laguerre, Executive Vice-President and Head of Private Equity and Capital Solutions, CDPQ.

“We are pleased to partner with Constellation and CDPQ to acquire Ohio National, an established and diversified insurance carrier with a nation-wide footprint.Ontario Teachers' brings our deep expertise in investing in the insurance sector to bear in backing Anurag to grow the Constellation platform,” said Karen Frank, Senior Managing Director, Equities at Ontario Teachers’.

The transaction is subject to customary conditions, including regulatory approvals, the approval of the Ohio Director of Insurance and ONMH’s member approval. 

Debevoise & Plimpton LLP is serving as legal counsel to Constellation in the transaction.

ABOUT CONSTELLATION

Constellation is an insurance holding company targeting acquisitions of life and P&C insurers based in North America, with the strategic intent of building a substantial, highly rated and conservatively managed multi-line insurance business backed by long-term institutional capital. Constellation’s founding investors and equal partners, CDPQ and Ontario Teachers’, are two of the largest long-term institutional investors in North America, managing a total of over CA$500 billion in net assets, including over CA$80 billion in private capital investments.

ABOUT CDPQ

At Caisse de dépôt et placement du Québec (CDPQ), we invest constructively to generate sustainable returns over the long term. As a global investment group managing funds for public retirement and insurance plans, we work alongside our partners to build enterprises that drive performance and progress. We are active in the major financial markets, private equity, infrastructure, real estate and private debt. As at December 31, 2020, CDPQ’s net assets total CAD 365.5 billion. For more information, visit cdpq.com, follow us on Twitter or consult our Facebook or LinkedIn pages.

ABOUT ONTARIO TEACHERS’

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

ABOUT OHIO NATIONAL

Since 1909, Ohio National has been committed to helping individuals, families and businesses protect what matters most. Through our network of financial professionals across 49 states (all except New York), the District of Columbia and Puerto Rico and through affiliated operations in South America, we provide insurance products that help our policyholders achieve financial security and independence. As of December 31, 2020, its affiliated companies had $41.2 billion total assets under management. Products are issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Recognized as a Leader in Gender Equity by Queen City Certified.

A confidential Calpers board meeting on chief investment officer Ben Meng’s abrupt departure is the subject of an intensifying legal fight between the nation’s largest public pension fund and a former director.

Joseph John “J.J.” Jelincic sued the California Public Employees’ Retirement System earlier this month for transcripts and minutes of what he said was an improperly closed meeting held soon after Meng’s Aug. 5 resignation in the face of an alleged conflict of interest involving a Blackstone Group Inc. investment. Jelincic, a former investment officer who retired in 2019, served on the Calpers board from 2010 to 2018.

Though Calpers has not yet responded to the suit in court, a lawyer for the pension fund sent Jelincic a March 17 letter urging him to immediately withdraw his complaint “to mitigate the potential harm” done by him and an unnamed director who provided him with information about the Aug. 17 board meeting.

“Calpers will investigate and take appropriate action with respect to Mr. Jelincic and his source’s improper actions,” the lawyer, Ragesh Tangri, said in the letter, which was reviewed by Bloomberg.

Meng’s resignation came four months after a Calpers compliance team found he approved the Blackstone investment while personally owning shares in the private equity giant. His exit shook the pension fund, which manages nearly $450 billion and has frequently advocated for corporate governance reforms. Both Calpers Chief Executive Officer Marcie Frost and California state controller and Calpers board member Betty Yee have promised to implement oversight reforms, including possibly requiring the next CIO to divest personal holdings.

Board Secrecy

But Jelincic says the board’s secrecy about the August meeting shows it’s not committed to transparency about what happened. “The issue in this case, quite frankly, is that Calpers continues to hide information from the public and beneficiaries that should be made public,” he said in an interview.

Jelincic filed his lawsuit alleging Calpers violated the state’s open-meetings law after the pension fund’s legal staff rejected his information request. Though California law permits public agencies to discuss personnel matters in closed session, Jelincic claims Calpers is trying to use that exemption to avoid public scrutiny of a far broader discussion about Meng’s departure.

In his March 8 suit, Jelincic cited “a board member’s record” of the meeting in saying 55 topics were discussed, most of which “had nothing to do with personnel matters.” Instead, directors spent a “substantial portion” of the closed session discussing issues including the need for policies governing internal investigations, when the board should be informed of “serious issues,” and compliance matters. The board also discussed media coverage of Calpers, characterizing some of it as “gotcha articles,” the suit says.

According to Calpers though, the main issue is that Jelincic learned details of the meeting from an attendee. In his letter, Tangri said Jelincic should at least have redacted information about the meeting topics from his complaint.

“The plaintiff’s lawsuit states that a Calpers board member provided Jelincic with confidential information from a closed session meeting of the Calpers board,” said pension fund spokesman Wayne Davis. “That’s a clear violation of the law, and we are obligated as fiduciaries to investigate the matter.”

Trouble at Calpers: Abrupt Exit Hits $400 Billion State Fund

In a written response to Tangri reviewed by Bloomberg, Michael Risher, an attorney for Jelincic, said the confidentiality law doesn’t protect “matters that go beyond what is properly discussed” out of public view.“It seems that Calpers is attempting to turn the tables on those who pointed out it violated the law,” Risher said in an interview. “The fact that these topics were discussed in closed session might be embarrassing but it’s hard to imagine how this revelation could adversely affect legitimate interests.”Although the Calpers CIO is among the state’s highest-paid employees, the pension fund has churned through nine different individuals over the past two decades, with Meng serving less than two years. Calpers has delayed hiring Meng’s replacement due to the need to further clarify the pay and incentive structure and the reluctance of candidates to move during the Covid-19 pandemic, Frost said in a statement last week.

Meng’s personal investment in Blackstone was valued at less than $70,000, and Frost said in August that she believed the violation was unintentional. Meng had had a turbulent tenure even before then, with Calpers reporting an underwhelming 4.7% return during his first year as CIO.

A Chinese-born naturalized U.S. citizen, Meng had also faced suspicions about his allegiance from Republican politicians and conservative commentators because of a previous stint as deputy CIO at China’s State Administration of Foreign Exchange. Stephen Schwarzman was among the Wall Street figures who came to Meng’s defense.“This type of attack on an accomplished American citizen is unwarranted,” the Blackstone CEO said last year.

I agree with Stephen Schwarzman, the way Ben Meng was treated was absolutely despicable, and it might be one of many reasons why CalPERS is having a tough time finding a suitable successor.

Of course, CalPERS CEO Marcie Frost is stating publicly that it has delayed hiring Meng’s replacement due to the need to further clarify the pay and incentive structure and the reluctance of candidates to move during the Covid-19 pandemic, which makes sense.

As far as CalPERS secret board meeting, boards have closed door sessions all the time to discuss personnel and other private matters but given the "abrupt nature" of Ben Meng's departure, I too would have liked to be a fly on the wall to listen to what was discussed.

Alas, we will not find out, just like we will never find out the true story behind Mark Marchin's abrupt departure from CPP Investments.

I have heard plenty from very senior people who told me Mark Machin had very legitimate reasons to receive a COVID-19 vaccination while on a "very personal" trip to Dubai, but all that is history now, it's time to turn the page and move forward.

The same with Ben Meng. I've openly stated he was mistreated and CalPERS will have a very hard time finding a better CIO.

They will, eventually, but Ben Meng was heading in the right direction and his departure set America's largest pension fund back.

For example, Preeti Singh of the Wall Street Journal reports that Calpers steps back from four pillars strategy:

United States’ largest public pension system seems to be stepping back from an ambitious overhaul of its private equity strategy outlined several years ago, even as it plows more capital into the asset class.

In 2020, the $445bn California Public Employees’ Retirement System committed $18bn to private equity, more than 2½ times the $6.9bn it committed to the asset class in 2019, according to a report presented to the pension by its private equity consultant Meketa Investment Group. Almost 30% of the money went to co-investments and separately managed accounts, strategies of current focus, which Calpers expects will help it better manage costs associated with the portfolio, according to spokesman Wayne Davis.

Calpers has stepped back, at least for now, from an ambitious investment strategy developed several years ago by former chief investment officer Ted Eliopoulos, who left the fund in 2018, people familiar with the matter said. The “four pillars” strategy was expected to help Calpers deploy an additional $20bn into private equity to reach an 8% target allocation to the asset class and generate gains that would better help the pension fund meet a 7% actuarial rate of return. As of 31 December, private equity represented 7% of the total pension portfolio, pension documents show.

Over the past year, and especially since Eliopoulos’s successor, Ben Meng, resigned from Calpers in December, the pension fund has played down the “pillars” strategy even though private equity remains a core component of its investment portfolio, the people said.

Calpers originally unveiled the four pillars investment strategy back in 2018. Two of the four pillars were separate direct investment strategies that would receive a large portion of the additional $20bn that would go to private equity. One strategy, dubbed “Innovation,” would target direct investments in late-stage life sciences, technology and healthcare companies, while the other, called “Horizon,” would back established business in core sectors of the economy. The other two pillars built on existing strategies of committing capital to fund investments, co-investments, separate accounts and emerging managers.

The ambitious plan required an overhaul in governance and oversight structures that, despite several rounds of presentations by investment staff and initial approval in concept by Calpers’s board of trustees, never really progressed, the people said. The departures of both Eliopoulos and Meng left fewer advocates for the strategies, the people added.

“There is precious little upside in being too adventurous right now,” one of the people said.

Davis said that although the two direct investment strategies remain in the Calpers “investment toolbox,” the pension is currently focused on strengthening other parts of the private equity portfolio.

Calpers pledged some $5.2bn to co-investment deals and separately managed accounts during the second half of last year alone, the pension’s performance report shows. The largest commitment of $1.5bn went to a separate account managed by LongRange Capital, a midmarket private equity firm launched in 2019 by Robert Berlin, a former managing director at Boston-based investment firm The Baupost Group.

The pension system has recruited senior leadership in recent years that will help move its private equity program forward, the people said. Greg Ruiz has led the team for almost two years as managing investment director of Calpers’s private equity program, and last year the fund brought on Yup Kim as head of investments for private equity.

“The duo brings a lot of fresh energy to the private equity investment program,” one of the people said.

Sounds like CalPERS is focusing on increasing its co-investments, which it needs to do to lower fee drag, but the four pillars strategy made sense, as long as they got the governance right. 

Still, Greg Ruiz and Yup Kim are doing a great job in private equity and if they can, I'd like to see them increase co-investments to 50% (very tough without the requisite staff to analyze co-investment deals).

But CalPERS did pledge $5.2bn to co-investment deals and separately managed accounts during the second half of last year alone, and that is definitely a step in the right direction, one that both Ted Eliopoulos and Ben Meng were arguing for.

Lastly, the search for the next CIO continues.

Arleen Jacobius of Pensions & Investments reports that CalPERS whittles CIO pool to 3 before calling off search:

Andrew Willis of the Globe and Mail reports, meet John Graham, the pickleball player running the CPPIB:

In his first interview since becoming CEO, John Graham opens up about growth plans, strategy and pickleball.

On Friday nights, you’ll find John Graham and his wife playing pickleball near their home in Oakville. The newly named chief executive at one of the world’s largest asset managers, the $476-billion Canada Pension Plan Investment Board, took up the outdoor game – a hybrid of badminton and Ping-Pong – during the pandemic to stay nimble. In his first interview since becoming CEO, the 49year-old opened up on his plans for a fund responsible for 20 million Canadians’ retirement savings. It’s clear the new boss will push an 1,800-employee organization to be as light on its feet as he aspires to be on a pickleball court.

The CPPIB handed Mr. Graham the top job unexpectedly in late February. His predecessor, Mark Machin, resigned when the fund manager learned he received a COVID-19 vaccination early last month in the United Arab Emirates. Mr. Graham smiled when asked how his strategy for the CPPIB will differ from that of Mr. Machin, who ran the business for the past five years.

“I’ve always believed the saying that ‘strategy takes a back seat to execution.’ It’s all about execution,” Mr. Graham said, adding that he was part of the executive team that set strategy with Mr. Machin. The Ottawa native and former competitive squash player then told a story about how the CPPIB invested during the early days of the pandemic last spring, to highlight the nimble culture he wants to nurture.

First, a bit of background. The CPPIB is a relatively young Crown corporation – it was founded in 1997 – that has grown incredibly quickly. In just more than two decades, the organization evolved from a passive investor, buying stock and bond index funds, into an active global money manager, with nine offices in eight countries. The CPPIB now has deep expertise in numerous sectors, including private credit investments, where Mr. Graham built a 125-person team running a $42-billion portfolio prior to becoming CEO.

For leaders like Mr. Graham, the challenge with managing rapid growth is breaking down silos between divisions, to ensure employees share information and capital goes where it can earn the best return. Which brings us to how the CPPIB played the markets last March and April, as lenders came to grips with COVID-19.

In the early days of the pandemic, global credit markets froze. The CPPIB had money earmarked for sectors such as private credit – Mr. Graham’s group – but nowhere to put that money to work.

However, the team investing in public debt markets began pounding the table for what they saw as compelling opportunities to buy high-grade, triple-A rated credit securities at 70 cents on the dollar, a steep discount to their historic values.

The CPPIB quickly shifted billions of dollars into these fixed income investments, pulling capital out of other asset classes.

Mr. Graham said the fund made handsome returns in the weeks that followed, as credit markets bounced back and triple-A rated securities again traded near 100 cents on the dollar.

“We have the resources and the capability to be the best in the world, where we decide to be the best,” he said. “The nuance in that approach is to be the best, we all have to think and act as one fund, as one team that works together.”

Looking ahead, Mr. Graham said the CPPIB will need to be flexible as it commits to new investments, to avoid missteps at a time when public equity market valuations “are pretty rich and some geographies are pretty rich.” The CEO currently sees opportunities in sectors such as venture capital – where its San Francisco-based team invests alongside established VC funds – and in countries such as India.

The CPPIB overlays environmental, social and governance (ESG) criteria when it puts money to work, an approach honed over more than a decade.

Mr. Graham said investing with ESG themes is opening the CPPIB up to promising new sectors, including investments in battery storage and businesses that develop new, lightweight materials for aircraft and cars.

The Toronto-based fund manager’s ESG expertise could help the CPPIB win roles in the wave of infrastructure projects expected under U.S. President Joe Biden. “As an active global investor in infrastructure, we are keenly watching the broad spectrum of opportunities that arise in the U.S.,” he said.

Under its new leader, the CPPIB will also continue to invest in energy projects, including Alberta oil and gas businesses, and attempt to profit as these companies shift towards sustainable business models. “We think energy transition, including the shift to renewables, will be one of the biggest investment opportunities over the next 10 years,” Mr. Graham said. “We don’t believe in a blanket divestment approach. We’re active investors, and an approach of engagement will have more impact.”

Mr. Graham has been working from home for the past year – he did an interview across a colleague’s backyard picnic table – and says he is proud of CPPIB employees’ productivity during the pandemic. However, the new boss said he is looking forward to getting back to work in an office. He also said the CPPIB will continue to invest in high quality real estate, including office buildings. The fund manager currently invests 11 per cent of its portfolio in properties.

“Managing a remote work force presents challenges. It requires a formal, scheduled way of working, as opposed to the office,” Mr. Graham said. “I’ve always managed in part by walking around.” And lately, he’s been blowing off steam at the end of the week with a game of pickleball.

Earlier today, I had a chance to speak with CPP Investments' new CEO, John Graham.

Let me begin by thanking him for taking some time to call me and I also want to thank Michel Leduc for setting up this call.

I began by congratulating him on this appointment and by stating the obvious, namely, that I wish it happened under different circumstances, because the abrupt departure of Mark Machin took some of the limelight away from his nomination. 

I also told him many people don't understand that CPP Investments is a very large, sophisticated organization and succession planning is always happening precisely because of unforeseen events.

Now, I realize people have their opinions about Mark Machin's departure. Claude Lamoureux, the former head of the Ontario Teachers’ Pension Plan, said Machin should not have had to leave, stating this to BNN Bloomberg:

“I think if he worked for another board and not CPPIB, I’m sure the decision would’ve been different,” Lamoureux said on BNN Bloomberg. “Yes, it’s mistake but it’s not a mistake to receive the penalty it received.”

He's not alone, others have shared similar sentiments, telling me there were legitimate personal reasons as to why Mark Machin flew to Dubai to be vaccinated and CPP Investments' Board "bungled it up" and it looks like "they were pressured to do so by the federal government to act swiftly."

[Side note: If Claude Lamoureux is looking to be on the board of directors of a big pension fund, PSP Investments is looking for qualified candidates with his credentials and experience. He and anyone else interested can apply here.]

There may very well have been legitimate reasons as to why Mark Machin left to be vaccinated in Dubai but the optics were terrible and rightly or wrongly, CPP Investments' Board made a decision and there's really no point going over what happened because we simply are not privy to all the details.

I think we need to turn the page here. As I've stated plenty of times, Mark Machin is an incredible leader, one of a kind, and I would have liked to see him leave the organization under much better circumstances and on his own terms (he deserved better).

I would have also liked to have seen John Graham be appointed to the top job under very different circumstances because he too deserved a much better welcome, one that wasn't shrouded in conspiracy theories.

But in life "you can't always get what you want" as the Rolling Stones once noted, you need to deal with the cards your dealt with and move on.

Alright, back to my conversation with John Graham.

He began by telling me he's "very honored" to be assuming this important role.

I found him to be very nice, super smart, very focused and very empathetic, concerned about his employees' well-being during this pandemic (more on that below).

I began by asking him how someone with a doctorate in physical chemistry who spent almost a decade as a research scientist at Xerox land at CPP Investments to run the country's largest credit portfolio and now running the whole show?

"Very gradually" John replied, "I also earned an MBA and worked on strategy and allocation at Xerox before moving over to CPPIB to work in the Total Portfolio Management group which was then run by John Ilkiw," the former Senior Vice-President, Portfolio Design and Investment Research.

"Ed Cass (the first ever CIO at the organization) is now running that team" which looks to allocate capital among different asset classes and strategies.

"I then moved over into credit working with Mark Jenkins (who left in 2016 to become the Head of Global Credit at Carlyle) and learned quite a lot." 

He took on leadership of Principal Credit Investments in 2016 as Managing Director and Global Head of the group.

Under Mark Machin, he was appointed Senior Managing Director, responsible for leading the Principal Credit Investments, Private Real Estate Debt and the Public Credit functions:

“For the first time in CPPIB’s history we are going to have all of our credit investors in one department,” says Graham. “Credit as an asset class is one of the largest globally and this change is going to provide the opportunity to have all of the experts together to build a global, diversified credit portfolio that maximizes value for CPPIB.”

The shift is crucial to support our strategic mandate to become an increasingly global investor and properly respond to the opening of credit markets in China, India and Latin America.
 
Graham notes those markets are less developed than credit markets in North America and Europe, and makes viewing credit through a broad lens increasingly important. 

“We are going to have a mandate across the credit spectrum from investment grade to non-investment grade, and corporate to asset-backed lending,” he says. “It’s a broad mandate and we are currently developing a go-to-market strategy for new geographies, leveraging the breadth in a deliberate and methodical way.”

Graham adds this new approach to credit investing will differentiate CPPIB from organizations that house credit within regional departments, asset class groups (such as real estate), or separate it based investment grade and non-investment grade.

“When you invest in emerging markets, the lines between these asset classes – or these segments of the asset classes – are very blurred,” he says. “Having all investors within one department allows us to look beyond product labels and focus on the underlying risk/return trade-off.”

John noted that CPP Investments' credit team has "world class relationships" and with its acquisition of Antares, it has significantly scaled up its operations and delivered great returns.

Where the conversation got interesting was when I asked him about how he was going to make sure everyone looks at total fund performance and maintains a total fund focus.

Here, he began with his experience in the credit team stating the focus was always on "delivering the best returns in the credit portfolio" across 16 sub-strategies and across the spectrum of liquidity.

John said the same focus on "delivering great returns" now applies to the entire CPP Fund which basically means:

• Allocating capital across asset classes and strategies where opportunities lie (Ed Cass's job)
• Focus on security selection 
• Leverage off existing relationships and diversify across geographies/ sectors/ strategies
  

He said CPP Investments is unlike single purpose funds which are basically "hammers trying to find nails".

Instead, the CPP Fund covers many geographies and strategies and as such is broad enough to capitalize on capital dislocations across the capital/ liquidity/ geographic spectrum. 

I also asked John about how they were able to handle the pandemic.

Here, he separated it into business operations and HR issues.

In terms of operations, they were able to  execute and "monetize on their existing relationships" to continue investing where opportunities lie.

In terms of its workforce, he said the focus is on "mental health" and making sure nobody is falling through the cracks.

He said Mary Sullivan, the Senior Managing Director & Chief Talent Officer, and her team are doing a great job implementing a multi faceted approach to make sure people aren't left behind, that managers check in regularly with everyone in their team and that employees are able to recharge if needed.

As far as he's personally concerned, John was very honest: "I'm lucky, my two kids are in high school now, learning online, others have been disproportionately impacted by the pandemic."

I think this is why he wants people back in the office once it's safe so those that are disproportionately impacted can feel better again as life resumes back to normal.

But he agrees with me that "the future of work" remains a big mystery and that some sort of hybrid model will prevail as those who have legitimate health issues might not go back to the office and others will want a better work-family balance.

"The key for me and my senior managers is to over-communicate now, making sure all our employees feel engaged" despite the pandemic. 

Lastly, we spoke about changes to strategy and who will take over as head of credit.

He told me he was "one of the co-architects" of the current strategy they adopted and believes in its pillars so there won't be significant changes there and the focus will remain on execution.

As far as who will replace him as head of credit, he stated "TBD but there will be an announcement in six weeks once we announce our results."

I thank John Graham for taking the time to talk to me earlier, I enjoyed our conversation and look forward to talking to him again once fiscal 2021 results are released. 

Below, CPP Investments' 2020 New Brunswick public meeting. I watched it all but if you're pressed for time, fast forward to minute 25 where Tara Perkins talks with John Graham.

Great short discussion, he covers ESG and risk management, the renewables portfolio and a geopolitical risks too.

I look forward to seeing more interviews with John and wish him and the entire team at CPP Investments health above all and many years of success executing on their long term strategy.

U.S. stocks climbed on Friday, finishing the volatile week on a high note as stocks benefiting from a successful economic reopening outperformed again.

The Dow Jones Industrial Average closed 453.40 points higher, or 1.4%, to 33,072.88. The blue-chip benchmark was up only 65 points earlier in the day. The S&P 500 rose 1.7% to 3,974.54, hitting a record closing high and bringing its 2021 gains to 5.8%. The Nasdaq Composite erased a 0.8% loss and ended the session 1.2% higher to 13,138.72.

All three major benchmarks rallied to their session highs into the close with the Dow jumping tacking on more than 150 points in the final 8 minutes of trading. It was broad-based late buying. Beaten-up tech like Apple rallied into the green in the final minutes. Banks, energy and materials were all big winners in the final minutes and on the day.

President Joe Biden on Thursday announced a new goal of having 200 million Covid vaccination shots being distributed within his first 100 days in office. As of Friday, 100 million coronavirus vaccinations had been given since Biden was inaugurated.

Financial stocks rose after the Federal Reserve announced that banks could resume buybacks and raise dividends starting at the end of June. The central bank originally said it would lift pandemic era restrictions in the first quarter, but even the delayed move gives investors more clarity. Shares of JPMorgan rose 1.7%, while Bank of America advanced 2.7%.

Fears of rising inflation eased after data showed tame price pressures. The core personal consumption expenditure price index, which strips out volatile food and energy prices, rose 0.1% month over month, matching expectations from economists polled by Dow Jones. Year over year, the gauge climbed 1.4%, slightly lower than a 1.5% estimate.

“Softer-than-expected PCE deflator data support the idea that Treasury yields will likely consolidate over the short-term,” said Edward Moya, senior market analyst at Oanda. “The lower the baseline for inflation, the easier markets can become convinced that the upcoming pricing pressure surge will be transitory.”

The 10-year U.S. Treasury yield came off its high following the inflation data, and inched back up throughout the day. The benchmark rate rose 6 basis points to 1.67%.

Meanwhile, consumer sentiment in the U.S. continued to rise amid the vaccine rollout. A University of Michigan survey released Friday showed the final reading of the index of consumer sentiment was 84.9 in March, up from 76.8 in February. Economists polled by Dow Jones expected a reading of 83.7.

The Dow and the S&P 500 posted modest gains for the week, up 1.4% and 1.6%, respectively. The Nasdaq fell 0.6% on the week, however. The market rally has slowed down in recent weeks as rising interest rates and valuation concerns hit tech names.

“The market has felt like more of a grind lately, and this may become more of the norm as we enter year two of the recovery,” said Larry Adam, chief investment officer at Raymond James. “These periods, like most, do not move in straight lines, as drawdowns will occur along the way. This is not troubling, but investors should expect some weakness and take advantage as it occurs.”

What a crazy day, someone obviously wanted to ramp up the markets going into the close but all this talk of "record" close on the S&P500 is misleading.

Apart from the last eight minutes of trading today, it was a god awful week, with heavy selling/ deleveraging in some stocks/ sectors which was downright scary.

But first, before I forget, take the time to read François Trahan's latest market comment on the Fed trade nobody is talking about. You can view it here.

Recall, last week, I went over why François thinks we are in the fourth inning of a cyclical leadership.

This week, he explains why rate hikes are coming sooner than you think and what that means for your investments:

The Federal Reserve has been THE big topic in recent weeks. Signs of inflation and the infamous "Dot Plot" from the Fed's March meeting have revived expectations of eventual rate hikes amongst investors. Truth be told, our thinking was already there. In our minds, the U.S. economy looks set to rebound strongly as the pandemic fades courtesy of near-zero rates and a $1.9T fiscal stimulus. This makes rate hikes inevitable. It's a question of WHEN, not IF.

The Fed has a big influence on equity leadership that is not always recognized. Its conduit is through long-term rates and the impact they have on valuation, and "Long-Duration" stocks in particular. The Fed Trade as we see it is "Short-Duration" stocks, a basket that is already up more than 20% in 2021. Needless to say, the "Long-Duration" stocks are lagging equities this year. More importantly, history shows that the performance gap between these two buckets continues to widen as long as bond yields are moving higher (i.e. as long as the Fed is raising rates).

To be clear, by "short-duration" stocks he means cyclicals like Financials (XLF), Industrials (XLI) and Energy (XLE) and by "long-duration" stocks he means Utilities (XLU), Tech (XLK) and Real Estate (XLRE).

Anyway, take the time to read his latest comment here and if you want to receive his research, enter your email here.

François is an exceptional strategist, one of the best there is, so please take the time to read his thoughts and I personally think every institutional investor should be a client of his, he's not only that good, he's also a great guy.

Now, do I think the Fed is about to start tightening a lot sooner than the market anticipates?

Well, as François states, the bond market has already begun to price in an eventual tightening cycle and there are a lot of reasons to believe the Fed will need to hike sooner than it is currently telegraphing:

• Vaccine rollout in the US is going extremely well and President Joe Biden on Thursday announced a new goal of having 200 million Covid vaccination shots being distributed within his first 100 days in office. 
• Brookings believes this will not be another jobless recovery. If their GDP forecasts prove accurate, they estimate that monthly payroll employment gains over the next 10 months will average between 700,000 and 1 million per month, a lot faster than many forecasters anticipate.
• According to BlackRock, Federal Reserve policy, the fiscal boost from the $1.9t stimulus, pent-up demand due to personal savings levels rising, and rising production costs will push inflation expectations higher. 
• US economic activity is picking up and this may force the Fed to start talking up a rate hike. In fact, this week, Dallas Fed President Robert Kaplan said an interest rate hike could come as soon as 2022.

But there are also reasons to believe the Fed might hold off as long as possible this time around:

• In a post-pandemic world where uncertainty abounds, employment gains may be muted until businesses feel more certain to increase their payrolls.
• There's a fight gearing up over Biden's plan to raise taxes on rich, corporations. If his administration successfully passes a tax plan that targets the rich and corporations, it will restrict financial conditions and force the Fed to wait before embarking on a tightening campaign.
  
• Since 2008, markets have consistently priced in a more aggressive path of Fed rate hikes than what ultimately happened. Consider the situation in late 2008: traders were already bracing for several hikes in the years ahead, according to data crunched by JPMorgan Chase & Co., but policy makers held off on tightening until 2015.
• The Federal Reserve has vowed to continue keeping policy loose, even in the face of surging asset valuations.“We won’t be preemptively taking the punch bowl away,” San Francisco Fed President Mary Daly said this week.Some investing experts are leery of the Fed’s stance, but Bank of America is advising clients to take advantage. 
• Tensions with China and North Korea are on the rise, will geopolitical risks weigh in the Fed?
  
• There's a tremendous amount of leverage in the financial system and the housing market. The mere hint of a rate hike can cause an avalanche of deleveraging.

The last theme is what I want to focus on today because this week was a lot more brutal than the Dow Jones or Nasdaq lead you to believe.

On Friday, ViacomCBS and Discovery shares plunged on a new downgrade and block trades:

A rally in ViacomCBS Inc. and Discovery Inc. that pushed the media companies to the top of the S&P 500 Index this year further unraveled on Friday after another major Wall Street firm said the stocks were overvalued.

ViacomCBS and Discovery posted their biggest declines ever in the aftermath of a downgrade by Wells Fargo, which joined a chorus of firms that have also turned more bearish on the stocks this year.

ViacomCBS closed 27% lower to $48.23, down from a high of $100.34 on March 22. Discovery also slumped 27% to $41.90, down from $77.27 on March 19. Other media stocks tumbled, too, with AMC Networks Inc. losing 6.4% and Fox Corp. retreating 6.2%.

All of these companies are crowding into the streaming market, where they face intense competition from established leaders like Netflix Inc., Walt Disney Co. and Amazon.com Inc. They have less to offer in the breadth and popularity of their programming and face a tough fight. At the same time, they are losing traditional pay-TV customers to the bigger players.

“We do see gravity pulling the multiples closer to prior norms,” Wells Fargo analyst Steven Cahall said in a note.

Both stocks saw their valuations stretched by ferocious rallies this year. Viacom, at its peak price just over $100, was trading for almost 25 times analyst estimates for 2021 adjusted earnings compiled by Bloomberg, its highest multiple in a decade. At $77.27 on March 19, Discovery fetched almost 27 times.

The selloff began on Monday when ViacomCBS reported an offering of $2 billion in shares after closing at a record high. The stock fell 9.1% the following day, dragging down Discovery. On Friday, large block trades on both shares said to be offered via Goldman Sachs and Morgan Stanley, added to the selling pressure.

Viacom and Discovery shares are echoing volatility in a host of companies that soared on lockdown trades, including Zillow Group and Peloton Inc. and to some degree the entire blank-check SPAC space.

Did you catch the part about large block trades on both shares offered via Goldman and Morgan Stanley?

That doesn't happen every day, it happens when large hedge funds want to liquidate their positions, pronto!

Not surprisingly, the price action on both stocks was brutal today on massive volume:

Those are weekly charts with weekly candles and it was just brutal today.

So what if some highly levered hedge funds or trading outfits had to liquidate their positions? More opportunities for BlackRock, Vanguard, Fidelity and global pensions and sovereign wealth funds to scoop some shares at a deep discount, right?

Well, yes and no, because it's not just these two stocks that got slammed this week.

Look at shares of Chinese electric-vehicle maker NIO (NIO) which got slammed today after the company said it will halt production at its Hefei factory for five days due to the global semiconductor shortage:

Well, not that simple because a lot of big quantitative hedge funds were levered long here and the selloff in this stock might be something to worry about.

In particular, is there some sort of deleveraging going on underneath the market surface? 

Look at biotech shares (XBI) which have been slammed hard this month:

Same thing with solar stocks (TAN), they keep getting pounded on every pop:

Now, this could be end-of-quarter rebalancing from hedge funds but biotechs and solars represent RISK-ON appetite and my point is the mindset is clearly RISK-OFF.

The same thing goes for hot IPO stocks, they're getting clobbered:

Then there's the unARKing of the market which I warned of in mid-January:

Well, so what? A bunch of hyper-growth and highly speculative stocks are getting the hot air let out of them, why does it matter?

It matters because if the selling continues, it can take a life of its own and then deleveraging mini tremors can turn out to cause a massive earthquake as the deleveraging spreads across the entire market.

Bullocks! As long as Financials (XLF), Industrials (XLI) and Big Tech (XLK) continue to grind higher, the market is perfectly fine!

Maybe but if you look at Big Tech (XLK is mostly Apple and Microsoft but they're all the same trading pattern, flat to down), you'll see it has been stalling over the past two months as financials, industrials and energy rallied.

Now, I don't doubt some hedge funds will be buying some Big Tech names going into Q2 while others will just continue adding to banks, industrials and energy, but even financials and industrials have run up a lot recently, so my big worry is the entire market might get stuck in this sea of liquidity.

And just like one ship stuck in Suez Canal is causing so much disruption, my big worry is that there may be a series of deleveraging trades done by big hedge funds/ large trading outfits that are going to cause massive market disruption.

Also, just like there may be structural damage on that ship as it remains wedged, my fear is that a rising rate environment, if it persists, might expose some serious structural damage in markets.

If a full-blown deleveraging storm spreads across the entire market, starting with the weakest most highly speculative stocks, then the Fed trade nobody sees coming is a Fed rate cut/ more QE, not a tightening cycle, and that won't be good for markets.

Alright, before I end off, have a look at small cap stocks:

This too is a RISK-ON trade which looks sets to reverse as it's forming a head and shoulders pattern.

Deleveraging in small caps will be particularly brutal as they ran up the most.

Anyways, below, the best performing large cap stocks this week:

And here are how the S&P sectors performed this week:

As you can see "long-duration" safe sectors outperformed "short-duration" cyclical sectors but the latter got ramped up during the last eight minutes of the market today.

We shall see what April brings us but this past month and quarter is one for the history books.

Just keep an eye on deleveraging in the most speculative sectors (AI, biotech, solars, EV stocks, ARK, etc.) and not so speculative areas of the market (like small caps) to see if things get better or worse.

And remember to read François Trahan's latest market comment on the Fed trade nobody is talking about here.

Below, in the latest episode of Influencers, Bridgewater Associates founder, Ray Dalio, discusses the volatility in the stock market, Bitcoin as a substitute for gold, and the rise of China as an economic superpower with Yahoo Finance Editor-in-Chief Andy Serwer. Take the time to watch this episode.

And CNBC's "Halftime Report" team discusses what they're watching in the market and the US economy.

“A lot of people talk about my impeccable timing,” laughs Charles Emond.

He became CEO of the Caisse de dépôt et placement du Québec (CDPQ)in February 2020, just one month before COVID-19 brought global commerce to a grinding halt.

After formally introducing himself to media, clients and employees as the head of Canada’s second largest pension fund, he spent the month pulling all-nighters to report the fund’s 2019 investment results and push through a transaction making CDPQ the largest shareholder in rail transport giant Alstom.

By the end of February he was receiving reports from CDPQ’s Singapore branch about the early stages of COVID-19 spread. And by the time he returned from a vacation in early March, Canada was heading into a lockdown that would all but completely shut down its economy.

“You go from looking five years ahead to five hours ahead. Some moments felt like sort of a science fiction movie. So you say, ‘OK, this won’t be going as anticipated.’ ”

And it didn’t, Emond says. But looking back at the year, he’s found a lot to be proud of.

As the head of one of Canada’s major institutional investors, Emond describes his business in terms of risks and opportunities. And steering CDPQ through 2020 brought tougher risks than he had ever experienced.

“If my chief risk officer had described a scenario where some of our companies’ revenue line will go to zero and the whole world will go into lockdown, I would have said, ‘Tone it down a little bit.’ ”

But the pandemic didn’t just bring risk. It also brought the opportunity for Emond to prove himself during a crisis. He did just that, turning CDPQ’s 2.3 per cent loss in the first half of 2020 into a 7.7 per cent return by the end. He created a $4-billion fund to shore up liquid assets for companies that had been profitable before the pandemic, whether they were part of CDPQ’s portfolio or not, and expanded CDPQ’s commitment to environmental, social and governance investing.

“Would I prefer not to have this crisis? Just asking the question is answering it,” he says, “But it’s a superb validation test. These crises act like an X-ray on an organization, what it stands for and what it can do better.”

When Emond took over as CEO, Emond inherited CDPQ’s legacy of climate-friendly investing from his predecessor, Michael Sabia.

In 2017, Sabia committed CDPQ to a series of goals designed to get the firm on track for a zero carbon emissions portfolio by the year 2050, in accordance with UN goals on climate change. Sabia planned to increase CDPQ’s investment in low-carbon assets 50 per cent by 2020, a target later raised to 80 per cent when they hit 50 ahead of schedule.

As of the 2019 end-of-year report, CDPQ had exceeded that goal with a boost of almost 90 per cent — from $18 billion in 2017 to $34 billion today. The firm has also implemented a system to track the greenhouse gas emissions for each dollar it invests and is now on track to reduce the carbon intensity per dollar by 25 per cent by 2025.

In a move that shows particular commitment, notes Sean Cleary, executive director of the Institute for Sustainable Finance, CDPQ tied a portion of their employees’ variable compensation to their success in meeting climate goals. By doing that, Sabia’s administration created a direct financial incentive to weigh climate outcomes just like any other part of their long-term returns.

“The thing to recognize is that (investment returns and sustainability) are not by any means mutually exclusive,” says Cleary. “Taking the fact that we’re dealing with climate change into account is just a smart thing to do when assessing the risk and the opportunity of an investment.”

“When we’re looking at who the investors are with an interest in clean technology, (CDPQ) are one of the big players,” says Rachel Samson, research director of clean growth for the Canadian Institute for Climate Choices. “One of the great things about institutional investors is that they’re not looking for a quick return, necessarily. They’re willing to think about where the economy is going, where policy is going and invest in something that’s going to pay off down the road.”

Still, she says, it’s important to keep the size of CDPQ’s sustainable assets in perspective with the rest of their holdings. Because while $34 billion is no small number, it only makes up about a tenth of a total portfolio of $340.1 billion.

And the rest of that portfolio includes some much higher-carbon assets, including the McInnis Cement plant in Gaspé, in which CDPQ retains a 17 per cent stake after selling their controlling interest this winter. McInnis has been the centre of frequent environmental controversies focused on its extensive greenhouse gas emissions — up to 2 per cent of emissions for the entire province of Quebec at peak production, according to a 2014 McInnis press release.

But Emond says holding onto some stakes in carbon-heavy companies is an intentional part of his plan.

“I can greenwash the whole portfolio. That would be good, directionally. But my depositors, Quebecers, would still live in a world with climate issues.” Instead, he says, keeping their stake gets them a seat at the table, and an opportunity to work on lowering the plant’s carbon footprint.

With a strategy of engagement over divestment, he says CDPQ can make progress on reducing its portfolio’s carbon intensity in every sector, while still meeting their mandate to foster the economic development of Quebec.

“There are people whose job it is to work there. We owed it to them,” he says. “It’s easy to run away. But we won’t be far ahead in 10 years if we act like that each time.”

According to Maarika Paul, CDPQ’s executive vice-president and chief financial and operations officer, it’s that commitment to rigorously understanding all the needs and perspectives involved in a decision that makes Emond an effective leader. “I’ve worked for numerous CEOs. And very often CEOs are built for purpose,” she says. “In the time of a pandemic, he was an ideal candidate.”

To illustrate, she points to an operations project that overhauled CDPQ’s financial reporting systems. Emond insisted on taking the time to meet personally with the team in charge of the project, showing a commitment to deeply understanding the fund’s systems, she says.

“It was useful for him, but it had an enormous impact on the people involved. For the first time, a CEO was coming to see something that nobody pays a lot of attention to.”

Like Paul, Emond’s background is in accounting. That’s where he gets his instinct for rigorous analysis and clear communication, she says.

Emond agrees. “When you’ve been in customer service, covering clients all your time, you learn that you’re better off listening than speaking. I like it because it gives me a pulse of what’s happening in the trenches.”

That attitude of listening is one reason Emond says it’s time to expand CDPQ’s socially conscious investing beyond their leadership in sustainable finance. “Our stakeholders’ expectations are rising for what they expect nowadays from pension plans,” he says, “As successor to Michael, my job is to make sure this legacy is perpetuated, but is always at the forefront of the pack.”

Having met the 2020 goals, the overlapping crises of the past year have prompted him to add more social and governance goals to CDPQ’s existing environmental mandate. So far, he’s led CDPQ in signing a tobacco-free investing pledge and signing the BlackNorth pledge, a Toronto-based initiative to increase the proportion of Black Canadians represented in corporate leadership.

Under his leadership, CDPQ also launched Equity 25³, a $250-million-dollar fund that offers investments of $5 million to $30 million to small and medium Canadian businesses. To be selected, businesses must be willing to commit to the program’s diversity target: 25 per cent representation of people from diverse backgrounds — including in management and board of director positions — within five years of confirming their selection.

Combine those new commitments with CDPQ’s existing climate change obligations, co-ordinating a response to a global pandemic that included connecting portfolio companies with the funding, support and expertise, running a weekly video town hall for employees and planning a light rail transit system for east Montreal, and you’ve got a lot to tackle in your first year as CEO.

But Emond says he had a couple of key advantages: his background and his staff.

“My parents had always taught ‘give it all you’ve got.’ Perseverance was highly valued in my household. More perseverance than actual outcome,” he says, crediting that upbringing with his fast-paced work ethic. “I tell my executives to feel comfortable trying (new ideas). Failing fast is not that bad of an outcome. If you fail fast, it means you can try again. Not trying means falling behind.”

He says encouraging that attitude of openness is where some of CDPQ’s best ideas come from. “There’s a lot of grass- roots ideas that come out of our organization. That’s one of the things that satisfy me the most. (Equity 25³) was an initiative purely brought up by the employee base. That means we have a healthy organization.”

Kim Thomassin, CDPQ’s executive vice-president and head of investments in Quebec and stewardship investing, has known Emond for 30 years. She says he showed the same style of leadership when they were in school together at 18 and he was the captain of the basketball team at Quebec City’s CEGEP Champlain-Ste-Lawrence.

“He’s not the tallest, but he was a fierce competitor,” she says, thanks to communication skills that overcame a language barrier. “It was an English-speaking school. Charles being a Francophone gets there, makes it as captain. It’s just in his genes to lead.”

That love of sports has stuck with him, too, she says, providing a foundation for his time with his son, 14, and daughter, 10. “I wonder sometimes if he sleeps at night, because he always has time for family. He skis with his daughter, both his kids play hockey — goalie, so that’s special training. He finds the time.”

Charles laughs at that. “It’s nice of her to say that. My kids would tell you not enough. I call it the work/life imbalance.” Still, “I try to converge my interests with theirs and that gives us an efficient way to enjoy it and live something together.”

That dedication to his family means he always understands when his staff need to take time for their own, she says. It’s one of the key examples of an open, compassionate style of leadership that helps bring his team together.

“To do that in a pandemic, I think it takes a good dose of magic. I think my colleagues would all say that we’re willing to take a bullet for him.”

Magic or not, Emond is quick to say that neither he nor CDPQ can afford to take their leadership for granted. They have to earn it by providing social good. “That’s our licence to operate,” he says. “We are our constituents. We manage their money. Without it, we have no business. Their trust is at the core of what we do.”

According to a 2019 report from the Responsible Investing Association, the amount of Canadian assets invested using socially conscious methods has grown by more than $1 trillion since 2017, following a trend of exponential increase since 2006. The same report showed that about 62 per cent of asset holders surveyed were factoring responsible investment practices into their portfolio. As Emond puts it, environmental and social change are “no longer a nice-to-have” in any major investor’s portfolio, “they’re a need-to-have.”

Still, he says, the pace of change will need to accelerate. He describes the pandemic as a moment of awakening to the need for faster change on climate and social issues. As Rachel Samson pointed out, those assets remain a relatively small piece of many investors’ portfolios at a time when scientific messaging on climate change is getting increasingly bleak.

“Is this fast enough? Obviously not,” says Emond. “We’ve all agreed on the necessity but we’re still arguing on the how and at what pace. We can’t afford that debate for too long.”

“At the same time, I’m an optimist by nature. Who would have thought we’d develop a vaccine in a matter of a year? It’s never been done before. That gives me comfort without trying to understate the challenges we’re faced with. (Climate change) is an issue of such importance that the exponential line will pick up. It’s already beginning to.”

This is an excellent interview and very well written article, one that gives you a glimpse of Charles Emond's first year as CEO of CDPQ. 

And what a year it's been, one he and none of us will ever forget!

Late today, I had a chance to talk to Charles Emond, President and CEO of CDPQ.

I reached out to him on Saturday morning after this article appeared and he was kind enough to open a slot for me at the end of his long day today, so I thank him and his executive assistant Jo-Anne Hébert for coming back to me so fast to accommodate me.

Anyway, my virtual introductory meeting with Charles Emond was much longer than we both planed for but it was a fascinating conversation, at least for me, as I really got to know and appreciate CDPQ's 'virtual' leader as he calls himself (more on that below).

My first impressions were he's authentic, super nice and engaging, extremely intelligent but down to earth and very approachable, he really knows his subject matter and organization extremely well and is very appreciative of what he inherited from his predecessors but also knows where he is headed in this next chapter for CDPQ.

Also, his leadership style is more transparent and engaging than his predecessors, which is a welcome change from within and outside the organization (more on this below).

We talked so much, my head was spinning after so I took a moment to eat dinner, reflect on our conversation and focus on the important stuff. 

I began by telling him the pandemic was "a curse and a blessing" for him and Nathalie Palladitcheff, the CEO of Ivanhoé Cambridge, CDPQ's massive real estate subsidiary.

He agreed, stating he "fully supports Nathalie" and that they're doing some major repositioning in that portfolio.

The way he explained it to me is when Ivanhoé Cambridge was first created, it was an operator of malls mostly, not a powerhouse global investor, so some legacy issues persisted for years and needed to be addressed. "The pandemic only accelerated changes that were already taking place."

"We unloaded 20-25%" of the retail portfolio but in a disciplined and measured way, "not a fire sale," and are moving aggressively into logistics and multi-family. 

He says they have already done a lot and more is being done to reposition and strengthen that portfolio.

Interestingly, he told me without Real Estate, CDPQ would have earned a 10.9% net return last year but instead it gained 7.7% (Real Estate plunged 15.6% last year as it took some heavy writedowns in Retail and Offices).

As I stated when I covered the annual results, these drastic writedowns in Real Estate at Ivanhoé Cambridge and Oxford Properties (OMERS) are rare once in a lifetime events that were a direct consequence of the pandemic and how certain assets got hit hard.

Charles is very cognizant of this, he told me last year was a year of "wide distributions of returns between and within assets."

"From retail real estate to logistics, from transportation infrastructure to renewables and communications, from public to private markets, it was a year of wide dispersion."

Overall, he told me they derisked $30 B in the total portfolio, referring to assets across all assets classes (not just real estate). 

"This relates to divestments, restructurings, reducing exposures, refinancings, re-investments in Real Estate, Infra, Private Equity, etc. So it relates to roughly 10% of our total fund where we took measures to reduce the risk specific to certain files and exacerbated by the pandemic" (shopping malls, offices, transportation infrastructure assets, etc)

In fact, he told me they systematically reviewed each and every portfolio. 

Our conversation on Equities, both public and private was equally interesting.

Charles told me like other Canadian pensions, their Public Equities portfolio is more defensive in nature so they lagged the market where a handful of tech stocks really outperformed.

But they really outperformed in Private Equity (20.7% vs 9.9% for the benchmark) because of their exposure to healthcare, services and technology.

"We prefer having tech exposure in Private Equity as opposed to chasing the FAANG names higher and higher (they invest in them) because we have a seat at the table and are able to have more control over our investment."

He added: "I tell my depositors, don't look at it as Public and Private Equities, look at it as Equities and when you do this, you'll see it in a more comprehensive way and that we delivered great results."

I agree, it's a well known fact that it's impossible to beat public equities benchmarks on any given year and over a  long period, pensions need to have a wiser approach across public and private equities to deliver solid returns over the long run.

Besides, there are so many shenanigans going in public markets, secret derivatives which allow obscure hedge funds to synthetically lever their portfolio, good luck trying to win at that game (don't get me started).

On technology, Charles told me they see it as "playing defense and offense".

They are digitizing some of their decision making to "remove biases" and "better filter" opportunities to make better investment decisions. 

One of the really interesting parts of our conversation was when we discussed breaking down the silos and how to have more collaboration amongst groups to make better decisions at a Fund level.

Here, he broke it down to two levels, top down and bottom up.

"At a top down level, we are setting asset allocation but we strive to do more from a bottom up portfolio construction level" (I wonder of he saw the Total Portfolio Management series Mihail Garchev and I put together on this blog last year).

He stated: "The way I see it, it's a $366 billion pension fund with many angles, technology, sustainability, and more and we need to be paying attention to all the moving parts."

He told me he took over some responsibilities after Macky Tall departed and now sits on CDPQ Infra's newly created board (see the full board here).

On strategy, he echoed what CPPIB's new CEO John Graham told me last week, "it's nice to strategize but for me, it's all about execution." 

Don't get me wrong, Charles believes in strategy but he's more a man of actions and doesn't like being bogged down in analysis/ paralysis.

Still, he did share three important strategies with me:

1. Transform and innovate: "This is what we are doing in Real Estate by repositioning the portfolio to diversify it by sectors and geography."
2. Strengthen: "We want to strengthen our portfolio construction and strengthen CDPQ Infra to make sure we can design, operate and commercialize its model for future growth."
3. Accelerate: "Like in our infrastructure investments where we want to increase it to $60 billion and private credit too."

He told me every week, he meets with Maxime Aucoin, Helen Beck, Claude Bergeron and a couple of others EVPs whose names escape me now to discuss strategy and filter it down.

"I have a great team, both men and women and feel lucky to work with them," he told me. 

I agree and told him one of the many good things Michael Sabia did was promote women to top spots at CDPQ.

He agreed and told me he firmly believes in diversity and inclusion at al levels of the organization and wants to hire more people from different backgrounds, "not just finance people."

In terms of the pandemic, he called himself the "virtual CEO" jokingly as he's been meeting people virtually but he also sounded a serious note.

"I want all our employees to feel engaged, so every week, I do a virtual meeting with everyone to inform them of what we are doing and I welcome questions from everyone. This way, they can relate and see where they fit into the bigger picture."

He added: "It takes a lot of preparation but I've gotten so much from it that even when we resume going back to the office, I plan on continuing it once a month."

Also, because he used to work a Scotia Bank's international offices, he empathizes with employees at CDPQ's international offices who are not at the head office.

"I was one of them, I totally relate to how they feel and can't wait to meet them in person."

He has big plans for CDPQ's international offices, wants them to get the recognition they deserve and he also shared a message for the folks on Bay Street.

"Tell them we are here and hungry for deals, especially if it's in our own backyard but also if it's elsewhere in Canada."

Bay Street people tend to shy away from CDPQ at times or they get lazy and just hit up the pensions in Toronto, but Charles wants to change some long standing perceptions on Bay Street.

And he's the perfect person to do it, fluently bilingual, very approachable and engaging and sharp as hell. 

I thoroughly enjoyed my conversation with Charles Emond and after speaking with him, I feel very reassured that CDPQ has a solid leader on many fronts, one who will listen and engage with everyone and knows where he's headed, always focused on execution first and foremost.

But also a leader who is humble enough not to take himself too seriously: "I'm far from perfect, have made and will make mistakes but we are focused on the long term. Like Mark Wiseman says, our quarter is measured over 25 years."

Anyway, I thank Charles again for a very engaging conversation. I also hope we see him in interviews across English media outlets as he's very engaging and communicates very well in both languages. 

Below, a great clip from the movie Margin Call. Don't ask me why I'm embedding it below, it has nothing to do with Charles Emond and CDPQ, it's just on my mind lately and I love this clip and movie.

The Healthcare of Ontario Pension Plan (HOOPP) announced today that it generated an 11.42% rate of return in 2020. In addition, it surpassed the $100 billion asset milestone, closing the year at $104.0 billion in net assets, up from $94.1 billion at the end of 2019. The Plan’s funded status is 119%, meaning that for every dollar it owes in pensions it has $1.19 in assets.

HOOPP has a 10-year annualized rate of return of 11.16%. In its latest report, consulting firm CEM Benchmarking found that HOOPP’s 10-year results were among the highest of pension plans worldwide, and was highest among CEM’s Canadian data set of 66 pension funds.

“HOOPP is very pleased to have delivered strong results for our members in the Ontario healthcare sector, and to have done so during what remains an extremely challenging time for them,” said Jeff Wendling, President and CEO, HOOPP. “It is a privilege to be the pension plan for healthcare heroes and our top priority is to ensure their pension remains safe and secure.”

Throughout 2020, HOOPP’s investment team successfully navigated volatile markets. The returns from the fixed-income and public equities portfolios were especially strong, and the real estate portfolio performed very well compared to its benchmark. The Fund’s liquidity management capabilities helped HOOPP act on significant buying opportunities to further strengthen the Fund.

Wendling added: “Being able to achieve these results in such a tumultuous year highlights the resilience of our highly diversified fund and long-term investment management approach. I am proud of what our team was able to accomplish last year for our members.”

Thanks to the strong results in 2020 and in previous years, HOOPP’s Board of Trustees has approved a benefit improvement for members. Effective April 1, members who were active in the Plan as of that date will receive an increase to their annual lifetime pension for any contributory service in the Plan in 2018, 2019 and/or 2020. Learn more about the details of this change.

The Plan’s strength also allowed HOOPP to provide a cost of living adjustment (COLA) in 2020 for our retired and deferred members to help their pensions keep up with rising costs.

HOOPP continues to evolve its investment strategies to adapt to the current low interest rate environment. This includes adjusting the Fund’s asset composition and continuing to find new ways to further diversify the portfolio. This is an evolution of the liability-driven investment (LDI) approach that has served HOOPP well for many years. At the core of this investment approach is matching assets with liabilities, which ensures HOOPP takes a long-term view and invests solely with its members’ pensions in mind.

In addition to delivering strong results, HOOPP continued to provide a high level of service to members while operating efficiently. Operating costs for the year represented just 0.31% of assets. Wendling said: “For all our members have to worry about right now, they don’t have to worry about their pension. While we remain in a period of economic uncertainty, HOOPP’s long track record of positive returns and low costs helps set a solid foundation to ensure that the Plan can pay pensions to members today and in the future.”

About the Healthcare of Ontario Pension Plan

HOOPP serves Ontario’s hospital and community-based healthcare sector, with more than 610 participating employers. Its membership includes nurses, medical technicians, food services staff, housekeeping staff, and many others who provide valued healthcare services. In total, HOOPP has more than 400,000 active, deferred and retired members.

HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board is jointly governed by the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses’ Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU). This governance model provides representation from both management and workers in support of the long-term interests of the Plan.

I want to begin by praising HOOPP's tireless members, both active and retired members who came out of retirement to join other frontline workers battling the pandemic.

As I keep reminding people reading this blog, pensions are first and foremost all about people, not investments, and giving members peace of mind that their retirement is well managed and secure over the long run.

On that front, HOOPP came through for its members once again last year, a year where Ontario's healthcare workers needed all the support they can get.

Any way you slice it, HOOPP's 2020 and long-term results are stellar, reassuring their members that their pension plan is delivering on its pension promise, now and over the long run.

Early this afternoon, I had a virtual meeting with HOOPP's CEO Jeff Wendling to discuss the 2020 results. I thank him and James Geuzebroek for arranging this discussion.

Before I get to our discussion, I'd like to go over some things in HOOPP's 2020 Annual Report.

As always, please take the time to read this report and other annual reports if you really want to understand Canada's large pensions in detail.

Alright, right at the top of this year's report is a big well-deserved  "Thank You" to all of HOOPP's members:

Next, some of the key highlights of 2020:

The most important point here isn't returns, it's that HOOPP remains fully funded and pushing up against the limit the Canada Revenue Agency allows for pension surpluses.

And this year they rightly decided to use some of that surplus to increase benefits:

Effective April 1, members who were active in the Plan as of that date will receive an increase to their annual lifetime pension for any contributory service in the Plan in 2018, 2019 and/or 2020. Learn more about the details of this change.

The Plan’s strength also allowed HOOPP to provide a cost of living adjustment (COLA) in 2020 for our retired and deferred members to help their pensions keep up with rising costs.

I don't know of any pension plan in the world that increased benefits in the midst of the pandemic, it speaks volumes as to how incredibly managed this plan has been over the long run.

Next, unlike other more mature plans, HOOPP is relatively young and its membership and the number of employers offering the plan are growing:

You know my thoughts on well-governed DB pensions, we aren't covering enough Canadians and this is a real shame.

If it were up to me, all of Canada's healthcare workers including doctors would be members of HOOPP's pension plan. Period.

Next, I read Dan Anderson (Chair) and Adrian Foster's (Vice Chair) message (page 19) and note this on ensuring HOOPP is well-positioned for the long run:

To make sure the Plan remains healthy for our members today and in the future, we need to continually adapt and evolve with the changing investment landscape. In addition to actively monitoring performance, our Board is providing oversight on enhancements to HOOPP’s investment strategy, including the evolution of its signature liability-driven investment approach. In 2020, HOOPP also continued to improve and refine its already-robust risk management practices and systems by enhancing technology and hiring a Chief Risk Officer who will head a new division focused on assessing, measuring, modelling, and reporting on risk. Taken together, these measures will help ensure that the Plan is properly positioned to generate the returns needed to pay pensions for the long term.

In our conversation, Jeff Wendling praised her (and I praised him for hiring her) and said risk management will remain a cornerstone of all HOOPP's investment activities.

Now, let me move on to Jeff Wendling's message in the Annual Report and it's worth reading it all:

The past year has been a challenging time for all of us, particularly our HOOPP members. Healthcare workers faced the staggering public health crisis resulting from the COVID-19 pandemic with courage and unwavering commitment, and we want to express our deepest appreciation for all they have done and continue to do.

We have always taken great pride in helping those who do so much to help each of us, and these events have only reinforced the strength of our commitment. We have focused on ensuring our members’ pensions are kept safe and secure, and on providing service in a seamless way. It is our privilege to be able to support our members by keeping HOOPP operating smoothly at all levels. 

Our first priority in this regard is to ensure that HOOPP delivers on our pension promise to you. We are pleased to report that as at Dec. 31, 2020, the Plan remains more than fully funded, with a funded status of 119%. In other words, the Plan has $1.19 in assets for every $1 that is owed in pensions. 

A history of solid investment performance 

The Fund’s net assets rose to an all-time high of $104 billion, as at Dec. 31, 2020, representing an annual rate of return of 11.42%. Being able to generate this investment return in such a tumultuous year highlights the strength of our liability-driven investment (LDI) approach and the resilience of the Fund. Through the course of the year, our investment team successfully navigated large and sudden swings in the markets, including one of the steepest declines ever in mid-March as investors around the world reacted to the impact of the COVID-19 pandemic. 

In its latest report for 2019, external consulting firm CEM Benchmarking found that HOOPP’s 10-year results were among the highest of pension plans worldwide. At the same time, our investment costs and overall risk profile continue to be among the lowest of our peers. Our long track record of positive returns and low costs helps set a solid foundation to ensure that the Plan can pay pensions to members today and in the future. 

Positioning HOOPP for the future 

To continue delivering on our pension promise, we need to ensure that we invest for the long term. This includes adapting our investment strategies as the market environment changes. In 2019, we began the process of evolving our LDI strategy, which has served HOOPP extremely well since it was launched in 2007. LDI is usually defined as matching Plan assets to pensions owed in the future or, in other words, the Plan’s liabilities. This approach keeps our focus on our members and helps ensure that we are generating the returns needed to pay pensions without taking on unnecessary risk. 

Bonds have traditionally played a key role in our LDI strategy, providing reliable returns while protecting the Fund against sharp corrections in equities. However, as interest rates have declined sharply, we have made changes to our Fund’s investment portfolio, and continued to add new assets and strategies. This includes infrastructure investments, which we think will serve us better in this low-interest-rate environment. This is an ongoing process that also includes evaluating opportunities to diversify the Fund’s international holdings, particularly in high-growth parts of the world. We will work to ensure that our LDI strategy continues to evolve and adapt to changing markets and investment environments. 

As global markets and investing become more complex, it is vital that we ensure our risk management practices continue to grow along with our Fund. In 2020, we began implementing a new risk system that will offer several benefits, including modelling for multiple asset classes, additional tools to calculate risk measurements, the ability to rapidly test the impact of market changes and respond to them, and more flexible and enhanced reporting. 

Along with this enhanced technology, we have centralized our risk functions by introducing a new Risk division and hiring Saskia Goedhart as our first Chief Risk Officer. This division will ensure our risk systems, practices, and monitoring continue to evolve to meet our future needs while providing expertise and comprehensive risk reporting to the Board. This marks a very important milestone for HOOPP. While we have always managed risk effectively, adding Saskia to the team and building out our risk function will enable us to expand and improve our capabilities as the Fund continues to grow in size and complexity. With these changes, we will be well-positioned going forward. 

Sustainable investing (SI) at HOOPP is also about delivering on our pension promise in a way that aligns with our values and promotes strong relationships with our stakeholders. This includes investing practices that integrate Environmental, Social & Governance (ESG) factors into our analysis, strategy, and asset management practices. In 2020, our ESG internal advisory group developed a comprehensive framework to ensure consistency with the responsible investing approach that we have followed and applied in our organization for many years: integration, stewardship, and fostering the sustainability of our communities and capital markets. 

We also released a joint statement with eight of Canada’s leading pension plan investment managers, representing $1.6 trillion in assets under management, calling on companies to provide relevant and consistent ESG information that enables us as an investor to allocate capital to investment best placed to deliver long-term sustainable value creation. We are enthusiastic about these first formal steps, and we will undoubtedly have more to share about our SI efforts as this area continues to grow in importance in the coming years. 

Supporting equity, diversity and inclusion 

Similarly, all around us we see an urgent push for change in the area of diversity and inclusion. We know that we don’t have all the answers today, but our leadership is committed to learning, growing and doing what’s right for all our employees, members and broader community. 

In July 2020, I signed a CEO pledge on behalf of HOOPP to support the BlackNorth Initiative. This initiative is committed to removing systemic barriers negatively affecting the lives of Black Canadians in corporate Canada. The pledge includes commitments such as fostering an open environment, increasing Black representation within our organization (including at senior levels) and creating a diversity leadership council. As part of this pledge, I reached out to many of our vendors and partners to encourage them to consider joining us in this initiative. 

More broadly, we want to ensure that HOOPP’s diversity efforts help promote a respectful and inclusive workplace culture for everyone regardless of race, ethnicity, gender, age, religion, disability, and sexual orientation. In 2020, we launched Employee Resource Groups to provide employees with a way to participate in and engage with this important effort to better our organization. Many employees have signed up, and we are excited to have these groups help guide our diversity efforts at a grassroots level going forward. 

We have also enhanced our recruitment practices and developed a new Equity, Diversity and Inclusion policy to formalize our longstanding practices. In addition to ensuring that everyone at HOOPP feels safe, respected, and valued, these efforts make our organization stronger. 

Inspired by our members 

These milestones and accomplishments come as HOOPP marks its 60th year of delivering on the pension promise for members. Since 1960, we have seen tremendous change — in the healthcare field, in financial markets and investing, and in Canadians’ working lives and savings habits. Over this period, the importance and value of a defined-benefit pension such as HOOPP have become increasingly clear. 

We have evolved to keep up with the times by adding employers and members to the Plan and continually adapting our investment strategies, technology, and overall operations to effectively manage the growth of the HOOPP Fund. Through it all, we have remained dedicated to our mission of providing pensions to members. This has driven our organization forward in the past and continues to do so under my leadership. 

Reflecting on my first full year as leader of this organization, I am extremely pleased with the way we have been able to keep our organization moving forward smoothly in unprecedented circumstances. I would like to thank the Board of Trustees for their support and guidance, our Executive Team for their leadership, and HOOPP staff for their hard work and commitment. 

We have ample reason to feel proud, and even cautiously optimistic, as we move forward from a tumultuous year. Though there is surely more uncertainty ahead, my hope is that we can continue to take our inspiration from our members in our commitment to provide them with a secure pension and peace of mind.

This is an excellent message, one I read a few times as it covers the most important developments at HOOPP.

One thing I am very keen on is diversity and inclusion, not just for portfolio companies but at the actual pension plans and funds I cover, so I was pleased to learn this:

More broadly, we want to ensure that HOOPP’s diversity efforts help promote a respectful and inclusive workplace culture for everyone regardless of race, ethnicity, gender, age, religion, disability, and sexual orientation. In 2020, we launched Employee Resource Groups to provide employees with a way to participate in and engage with this important effort to better our organization. Many employees have signed up, and we are excited to have these groups help guide our diversity efforts at a grassroots level going forward. 

A respectful and inclusive workplace culture doesn't just come from hiring people who look, walk and think differently, it comes from the top and permeates all the way down to the bottom and it requires a lot of hard work, at least initially.

You need to incorporate everyone's views, starting from the bottom, so I am very pleased that HOOPP launched Employee Resource Groups to provide employees with a way to participate in and engage in these sometimes difficult discussions and I encourage all the employees and senior managers to take this group seriously (every organization needs to do this, not just Canada's large pensions, it's the only way to ensure a diverse and inclusive workplace).

Why is this important? It's important to acknowledge that there are people in our society that are being systematically discriminated against because of their race, ethnicity, gender, age, religion, disability, and sexual orientation.

Apart from the moral aspect, addressing diversity and inclusion in a holistic, transparent and comprehensive way also allows organizations to move forward, to enhance their culture and it pays long-term dividends, in a lot more ways than the bottom line.

I also firmly believe in helping those in need in our society, especially the poor, disenfranchised and disadvantaged groups who need a helping hand. 

That's what HOOPP's members do on a daily basis as part of their job, but that's what we all need to do as part of being good citizens who take care of each other.

Alright, let me dive right into HOOPP's investment returns in 2020.

The table below shows the net investment income of HOOPP's two major portfolios -- the Liability Hedge Portfolio and the Return Seeking Portfolio -- over the last two years (page 42 of Annual Report):

As shown, the bulk of the net investment income came from nominal and real return bonds in the Liability Hedge Portfolio, and Public and Private Equities in the Return Seeking Portfolio.

Keep in mind, just like Ontario Teachers' Pension Plan, HOOPP does a lot of bond repos to leverage its massive bond portfolio but this is more balance sheet leverage, not to fund activities of other assets (at least not yet, it's a little complicated but both plans use various sources of leverage to enhance liquidity and returns).

The table above, however, doesn't tell us much about active management, that is the added value that HOOPP's managers add above their respective benchmarks.

Jeff Wendling and I actually had a chat as to maybe it's time to scrap this particular table or add a new one that shows net annualized returns by asset class and benchmark returns too, like what other pensions do (I understand that this is how they traditionally have shown returns but it makes sense to add a more detailed one with net annualized returns for each portfolio relative to benchmarks).

Still, right under this table, they explain sources of returns for active management:

The total Fund return of 11.42% exceeded the benchmark return of 9.80% by 1.62% or $1,513 million. This active management return, or value added, came from a variety of sources during the year within both the Liability Hedge Portfolio and Return Seeking Portfolio. The Liability Hedge Portfolio generated $1,136 million with a significant contribution coming from short-term, nominal bonds and real estate. The Return Seeking Portfolio generated the remaining $377 million, with the largest impacts coming from private equity, credit and absolute return strategies.

And they provide details on each portfolio which I encourage you to read (pages 43-48).

Given what has been going in real estate portfolios, my attention immediately went to that asset class:

At year-end, our real estate portfolio had a gross market value of $15.5 billion versus $14.6 billion at the end of 2019. Despite the pandemic causing global commercial real estate transaction volumes to decline by over 30% from 2019 levels, our transaction activity during the year included approximately $2.1 billion in new investments and commitments. Dispositions of non-core assets totaled $340 million. 

Over the last five years, our real estate portfolio generated a currency-hedged return of 8.2%, $1.8 billion over the benchmark. In 2020, the portfolio produced a return of 0.2% on a currency-hedged basis, and $499 million in value added. 

The key factors impacting returns were: 

• Negative impacts on our Canadian retail holdings: Ongoing headwinds from e-commerce on shopping malls were exacerbated by the pandemic’s impact on in-person shopping. 
• Negative impacts on our office portfolio: The income return from this portfolio was offset by value adjustments to reflect that office users are not likely to start returning to the office in material numbers until later in 2021, which will increase near-term leasing risk. We expect this to normalize once COVID vaccinations are widely distributed. 
• Very strong performance of our industrial and logistics portfolio: Across North America and Europe, this portfolio performed very well.
• Increases in the value of our land holdings and developments in progress this year: This also includes the effect of changing our fair value estimation from the cost approach to the more commonly used appraised value methodology. 

In 2020 we put several building blocks in place that will drive future growth as we continue to increase the scale and scope of our real estate portfolio. Examples include:

• commencement of over 5 million square feet of new development projects, with an estimated completion value of $1 billion 
• entry into strategic partnerships with leading specialists in the apartment, student housing, and industrial sectors in the U.S. to drive growth in that market.

The following charts illustrate the global diversification and property type mix of HOOPP’s real estate portfolio. We continue to expand our non-domestic portfolio, which grew by over $900 million and now represents 35% of our portfolio compared to 31% at year-end 2019. We also continue to expand our industrial footprint, where secular growth prospects and market fundamentals continue to be very positive. Our global industrial holdings grew by $1 billion and represent 32% of the portfolio, up from 27% at the start of the year. We also acquired key land sites in Canada, the U.S. and Europe totaling over 13 million square feet of development potential, which will drive further long-term growth in this sector.

It's important to note HOOPP started diversifying its real estate holdings by geography and by sector before the pandemic hit, and it continues to do so.

In fact, it's one of the biggest owners of logistics properties in Canada and has done a lot of deals domestically and abroad in this area (they will do more). And they have 16% in residential (multifamily).

Like CDPQ's CEO Charles Emond who I spoke with on Monday, Jeff Wendling told me there was a huge dispersion of returns between and within asset classes last year "so diversification everywhere" really helped mitigate downside risk.

What else did we chat about?

Like his predecessor, Jim Keohane, Jeff Wendling is a CIO at heart. 

He explained to me in detail what happened last year, how the Fund was positioned defensively going into 2020 and when rates dropped to record lows, they started selling off their bonds and continued selling (around 20% of their bond holdings).

He explained that in March when markets plunged, they were holding daily investment meetings to capitalize on dislocations in public markets as stocks plunged and credit spreads blew up.

They were buying everything, S&P 500, TSX, EFEA, Emerging Markets, preferred shares on Canadian banks, high yield bonds, structured credit, etc.

As Jeff explained it to me, markets snapped back quickly but they were still able to invest a considerable amount in a short time.

[Lesson to all pensions: When it hits the fan, let your senior investment managers make quick decisions, they need to be quick and nimble to capitalize on opportunities.]

Jeff was careful to explain to me that selling bonds wasn't part of a big tactical call on inflation, but rather a "required return call as yields on long bonds fell near zero."

On this point, please refer to a prior comment of mine on HOOPP's LDI strategy 2.0 where we discussed moving away from bonds into infrastructure, hedge funds, credit, insurance-linked notes, quant programs and more.

HOOPP is already huge and growing fast. Jeff Wendling has to manage that growth carefully and judiciously but they are still early in the growth game.

In infrastructure, they started investing and co-investing with funds and will do directs but it's a new asset class and the J-curve will weigh on those returns in the near term.

Private Equity is steady, they invest and co-invest with funds but Jeff told me 65% is fund investments and 35% is directs and co-investments but as the Fund grows and they want to maintain allocations and reduce fee drag, they will need to increase co-investments.

They also do private credit deals but structure their loans in a way to protect against downside risk (remember the Home Capital fiasco, they made a killing on that deal). 

I think the most important takeaways I got from my conversation with Jeff Wendling is that HOOPP is growing, they're going to hire more investment professionals, they're going to grow investment activities all over the world as they expand their LDI beyond bonds but they're going to do so in a measured way focusing on risk first and foremost. 

That's why HOOPP's new Chief Risk Officer Saskia Goedhartand her team are going to play a critical role as they manage the growth into new activities.

Jeff and I talked about my view that everything is overvalued. Jeff's observation is that most assets are at an all-time high, so it may be indicative that some assets are indeed overvalued. Regardless, we agreed that it’s very important right now that the strategy, execution, approach, partnerships, platforms, etc. all have to be aligned to get the right outcome.

I have no doubt HOOPP will continue delivering exceptional returns as it grows it doubles its assets over the next seven to ten years, delivering on its pension promise for decades to come.

Will there be bumps along the way? You bet, there always are, but they are more than capable of managing these risks as they arise, maintaining their long-term focus.

One big advantage (and disadvantage) Jeff and his team have is they're starting from scratch on many new activities so they can take their time and avoid investing where challenges remain. 

Lastly, since I get this question every year, what about compensation at HOOPP?

Compensation at HOOPP is very competitive, on par with its peers, but because it's a private trust and not a public pension, they don't publish executive compensation in their annual report.

I'm a stickler for transparency and believe because HOOPP manages the pension assets of captive clients, they should start publishing executive compensation in their annual report like Canada's large public pensions do (they all earn their comp, it should be public).

One big advantage HOOPP's employees have is they get to invest in their pension plan alongside their members, ensuring alignment of interests but also ensuring they receive the same benefits and peace of mind that come from a secure, well-governed defined-benefit pension plan. 

Also, on currency risk, HOOPP fully hedges its currency risk which helped it last year as the Canadian dollar gained on the greenback.

Alright, let me wrap it up here. Please take the time to read HOOPP's 2020 Annual Report for all the details I couldn't cover here, especially investment activities of different portfolios.

Once again, I  thank Jeff Wendling for taking the time to talk to me and James for arranging this chat.

I enjoy these discussions with CEOs/ CIOs so much that I wish I can do a panel discussion twice a year but that's a lot of work, preparation and probably impossible to coordinate.

What I tell them is what I tell you, my blog is a great platform to share ideas and progress. Its success completely depends on the input people are willing to share publicly.

Below, Amanda White of Top1000funds interviews HOOPP's CEO Jeff Wendling on liability driven investing 2.0. You can also listen to the podcast here, it's excellent.

Next, Jeff Wendling, president and CEO of the Healthcare of Ontario Pension Plan joins BNN Bloomberg to discuss their 2020 results. The company posted an 11.4 per cent return and is looking to expand internationally. Wendling says they have found opportunities to invest in emerging markets during the COVID-19 crisis  (see it here if it doesn't load below).

Also, learn about the peace of mind you’ll get from having a lifetime pension and learn about the benefits of keeping your pension with HOOPP and the risks associated with taking it out of the Plan. 

Lastly and most importantly, a huge thank you to all healthcare workers across Canada and the world, we owe you a lot for everything you've done and are doing to get us through this pandemic.

The S&P 500 crossed the 4,000 threshold for the first time on Thursday as Wall Street built on a solid March following the rollout of President Joe Biden’s infrastructure plan.

The broad equity benchmark rose 1.2% to a fresh record high of 4,019.87. The Dow Jones Industrial Average climbed 171.66 points, or 0.5%, to 33,153.21. The tech-heavy Nasdaq Composite jumped 1.8% to 13,480.11. Alphabet and Netflix jumped more than 3%, while Amazon and Microsoft gained over 2%.

Microsoft shares advanced on news that the software giant will deliver to the U.S. Army more than 120,000 devices based on its HoloLens augmented reality headset. The contract will be worth $21.9 billion over 10 years.

Tech stocks led the gains as bond yields continued to retreat from recent highs. The 10-year Treasury yield fell 7 basis points to around 1.68% Thursday. The benchmark rate hit a 14-month high about 1.77% last week.

The move in stocks came after Biden introduced his multitrillion-dollar infrastructure proposal. The plan includes spending on roads, bridges, green energy and water system upgrades. This marks the second major spending push of Biden’s presidency after he signed a $1.9 trillion relief and stimulus bill on March 11.

“The reopening of the U.S. economy continues to support equity markets as the light at the end of the coronavirus tunnel draws near,” said Craig Johnson, technical market strategist at Piper Sandler. ” Fiscal and monetary policy support remain unprecedented and well-telegraphed at this juncture.”

The plan Biden outlined Wednesday includes roughly $2 trillion in spending over eight years and would raise the corporate tax rate to 28% to fund it.

Still, some on Wall Street grew worried that higher taxes could pose a threat to rebounding corporate earnings and stock prices.

Bank of America equity strategist Savita Subramanian said that the market may still need to digest the tax hikes included in the plan, creating a potential headwind for stocks.

“I think the market is pricing in the good news of infrastructure ... I don’t think the market has necessarily priced in the negatives, which is how are we going to pay for this,” Subramanian said on CNBC’s “Fast Money.”

On the data front, an index of U.S. manufacturing activity jumped to a reading of 64.7 last month from 60.8 in February, according to the Institute for Supply Management. That was the highest level since December 1983.

Meanwhile, investors digested a worse-than-expected reading on weekly jobless claims. First-time claims for unemployment insurance for the week ended March 27 totaled 719,000, higher than 675,000 expected by economists surveyed by Dow Jones.

The key March jobs report will be released on Friday, although the stock market will be closed for the Good Friday holiday. Economists expect 630,000 jobs were added in March, and the unemployment rate fell to 6% from 6.2%, according to Dow Jones.

In deal news, Micron Technology and Western Digital are said to be exploring a deal to buy Japanese semiconductor firm Kioxia for about $30 billion, according to a Wall Street Journal report. Micron shares jumped 4.7% on the news, while Western Digital popped 6.9%.

Wall Street just wrapped up March with solid gains. The Dow and the S&P 500 climbed 6.6% and 4.3%, respectively, last month, posting their best month since November. The Nasdaq gained 0.4% in March as tech stocks came under pressure amid rising interest rates.

The bulls came out swinging April Fools' Day, closing out the week with solid gains.

Even though tech shares surged today, I caution my readers the Nasdaq remains below the level it was a month ago and it needs to cross back above 13,600 and sustain momentum for a reversal to take hold:

But tech shares (QQQ) did cross back above their 50-day moving average led by the big FAANG names and it's possible momentum continues if rates keep declining or even hold steady:

Will rates hold steady or keep declining? I see them stabilizing around these levels but if Friday's US jobs report for March posts a 'blowout month for reemployment' amid the vaccine rollout and spring weather, then it will put pressure on rates.

We shall see, I've long given up forecasting monthly jobs reports, on any given month it can surprise you either way but I do expect trends in the leisure and hospitality industry to continue showing strength.

What we know is private employers hired the most workers in six months in March as more Americans got vaccinated against COVID-19, pushing the economy towards a broader reopening, which is expected to unleash a strong wave of pent-up demand in the coming months.

This should augur well for nonfarm payrolls but I warn you, it's impossible to forecast even if private payrolls showed strong gains. 

Anyway, back to markets, it seems last week's deleveraging fears following the blowup of Archegos have been digested, for now, and stocks keep grinding higher.

For the week, all the major sectors of the S&P 500 posted solid gains led by Tech (XLK), Consumer Services (IYC) and Consumer Discretionary (XLY):

Over the past month, however, these three sectors trailed defensive and cyclical sectors which explains why the Dow and S&P 500 posted solid gains in March while the Nasdaq was flat:

Will FAANG stocks keep outperforming in Q2? Maybe, especially if earnings are solid, but nobody really knows and these markets are entering the "show me the money phase".

What I mean by that is a lot of stocks have run up hard over the last year, many are way above their pre-pandemic levels, so active management becomes more critical here to generate returns.

Stated differently, stocks are at or above fair value, they're not cheap, so if earnings don't propel them higher, it could be another tough slug ahead.

This is especially true for last year's high-flyers like the ARK Innovation hyper-growth stocks (ARKK), biotech (XBI), solar (TAN), Chinese internet shares (KWEB) and IPO stocks (IPO):

I don't see them making new highs this year, in fact, I see them being shorted very hard on every pop and it feels like a bear market is developing in the riskiest segments of the market. 

I'm not the only one seeing this. Martin Roberge of Canaccord Genuity states this in his weekly wrap-up going over "Stealth De-Risking":

Our focus this week is on the equity market and the stealth de-risking observed since mid-February. As our Chart of the Week shows, the most volatile areas of the market – new IPOs, SPACs and hyper-growth stocks – are down 18%–29% from their February peak. This dynamic should not come as a surprise since these companies are considered long-duration stocks whose value is derived by discounting cashflows that are far in the future. As such, the swift increase in bond yields, combined with the “laissez-faire” attitude of the Fed, has prompted some profit-taking in these high-flying stocks. But to the surprise of many among us, broad equity markets have absorbed this bout of volatility quite well, even pushing the CBOE VIX index below 20 for the first time since February 2020. Call it the magic of abundant liquidity; investors are rotating within the market rather than leaving the market. Now, when we account for record amounts of equity inflows in Q1, it feels like our melt-up scenario for Q2 remains a non-trivial upside risk.

According to Martin, there is a "benign rotation" going on right now, out of the most speculative names, into cyclicals like Financials (XLF),  Industrials (XLI), Energy (XLE) and Materials (XME):

Recall, two weeks ago, I explained why François Trahan of Trahan Macro Research thinks we are only in the fourth inning of a cyclicals rally.

But as I explained last week, if deleveraging unhinges the market, then there's a big problem with the "benign sector rotation" call into cyclicals.

What really irks me is this, how many other family offices or elite hedge funds for that matter, are using the very same secret derivatives that blew up Archegos?

The market is suppose to be fair and transparent, but every once in a while we are reminded about how it isn't, especially after a major blowup wipes out a fortune:

One reason is that Hwang never filed a 13F report of his holdings, which every investment manager holding more than $100 million in U.S. equities must fill out at the end of each quarter. That’s because he appears to have structured his trades using total return swaps, essentially putting the positions on the banks’ balance sheets. Swaps also enable investors to add a lot of leverage to a portfolio.

There are so many charts that look exactly like Viacom (VIAC) and Discovery (DISCA) before they got butchered on large bloc selling last week that part of me wonders: who's next to fall and will it have an impact on the overall market?

Having said this, there's a ton of liquidity in the financial system and Uncle Fed is monitoring the situation, no doubt, to make sure they're ready to provide more if a crisis erupts, so maybe there won't be any contagion, at least this is what the market is signalling, for now.

But I just generally feel uneasy about these markets, there's no conviction anywhere, and too many bulls are over-confident that the reopening/ strong recovery/ reflation/ inflation trade will dominate markets going forward.

The rebound in the US dollar and the decline in long bond yields might be an omen of things to come.

For all these reasons, I remain skeptical and will leave you once again with the wise insights of Jeremy Grantham who in late January warned that bubbles don’t burst all of a sudden, first you see the high-flyers get trounced, the overall market keeps grinding higher, but more and more stocks/ sectors start getting hit and then it catches up to the overall market (go to 30 minute mark to hear it from him).

I guess what I'm saying is while the bulls are coming our swinging early this quarter, maybe the joke will ultimately be on them, not the bears, so remain alert and manage your risk accordingly, these markets can easily lull you into a false sense of security.

I wish everyone celebrating a nice Catholic Easter, I will be back Monday or Tuesday.

Razak Musah Baba of IPE Real Assets reports that CPP Investments names Bruce Hogg as head of a new sustainable energy unit:

CPP Investments has combined its energy and resources investment division with its power and renewables business to create the C$18bn (€12.1bn) Sustainable Energy Group (SEG) led by Hogg as managing director.

Hogg, who joined 14 years ago, was most recently managing director and head of the pension fund’s power and renewables business.

Avik Dey, managing director and head of energy and resources at CPP Investments, will act as senior advisor to CPP Investments, supporting SEG and the office of the CEO over the next six months, following which he has decided to return to his entrepreneurial roots.

“The creation of the Sustainable Energy Group with significant, flexible capital positions us extremely well to pursue the best market opportunities across the entire energy spectrum. This, coupled with a deep, highly experienced team, will allow SEG to generate significant long-term value for the Fund,” Hogg said.

Deborah Orida, senior managing director and head of real assets at CPP Investments, said: “The energy sector is one of the most important enablers of the global economy and is composed of a wide spectrum of suppliers from conventional to renewable.

“Along our unique investment horizon, we see a dramatic opportunity to invest in, and support, the evolution and innovation occurring across the sector.”

In December last year, CPP Investments established Renewable Power Capital (RPC), a European renewable energy platform based in the UK, and appointed Bob Psaradellis to act as CEO of RPC.

At the time, CPP Investments, which manages the C$476bn funds of the Canada Pension Plan, said RPC will be funded by the C$9.1bn power and renewables investment strategy.

Rob Kozlowski of Pensions & Investments also reports that CPPIB appoints new head of sustainable energy group:

Bruce Hogg, a managing director at the Canada Pension Plan Investment Board, Toronto, was named head of the C$475.7 billion ($378.2 billion) pension fund's new sustainable energy group.

The position is new. The recently created group combines the board's energy and resources and power and renewables groups into a single team overseeing about C$18 billion in assets, a news release Tuesday said.

Mr. Hogg was previously head of power and renewables. Avik Dey, a managing director who was head of energy and resources, will remain with CPP Investment Board for the next six months after which he plans to leave the board to "return to his entrepreneurial roots," the news release said.

CPPIB spokesman Steve McCool could not be immediately reached for further information.

Earlier today, CPP Investments put out a press release on the creation of a new Sustainable Energy Group:

• Energy & Resources and Power & Renewables investment groups become Sustainable Energy Group
• Builds on existing investment strengths in renewables, conventional energy and innovation
• Positions CPP Investments to become the leading global energy investor

Toronto, Canada (April 6, 2021)– Canada Pension Plan Investment Board (“CPP Investments”) is creating the Sustainable Energy Group (SEG), a new investment group that combines the organization’s expertise in renewables, conventional energy and new technology and service solutions. SEG will generate compelling investment opportunities for the Fund, positioning CPP Investments as the leading global energy investor.

Through the combination of the Energy & Resources (E&R) and Power & Renewables (P&R) groups, SEG will have approximately $18 billion in assets, making it highly competitive and flexible in the large and dynamic global energy sector.

According to the Bloomberg New Energy Outlook 2020 report, around US$15.1 trillion is expected to be invested in new power capacity alone by 2050. SEG is well positioned to pursue a variety of opportunities in this, and the broader sustainable energy market, having combined expertise in conventional energy, renewable energy, carbon capture as well as emerging and disruptive opportunities through its innovation and technology and services team.

“The energy sector is one of the most important enablers of the global economy and is composed of a wide spectrum of suppliers from conventional to renewable. Along our unique investment horizon, we see a dramatic opportunity to invest in, and support, the evolution and innovation occurring across the sector,” says Deborah Orida, Senior Managing Director and Head of Real Assets, CPP Investments. “CPP Investments is exceptionally well placed to be among the winners, in part through our partnership model alongside companies willing to grasp the future and forge ahead.”

Bruce Hogg will lead the SEG as Managing Director, Head of Sustainable Energy Group. Mr. Hogg was most recently Managing Director, Head of Power & Renewables and has more than two decades of real assets investing experience. He joined CPP Investments 14 years ago, and during that time grew the Infrastructure team’s global business. More recently, he led the team that built a P&R portfolio of more than $9 billion in three years.

“The creation of the Sustainable Energy Group with significant, flexible capital positions us extremely well to pursue the best market opportunities across the entire energy spectrum. This, coupled with a deep, highly experienced team, will allow SEG to generate significant long-term value for the Fund,” says Bruce Hogg, Managing Director, Head of SEG, CPP Investments.

Avik Dey, Managing Director, Head of Energy & Resources, will act as Senior Advisor to CPP Investments, supporting SEG and the Office of the CEO over the next six months, following which he has decided to return to his entrepreneurial roots.

“On behalf of CPP Investments, I’d like to acknowledge Avik for his leadership of the Energy & Resources team. His vision played a key role in the creation of the Sustainable Energy Group and we thank him for his significant contributions to the organization over the past seven years,” added Ms. Orida.

About Sustainable Energy Group (SEG)

SEG takes advantage of growing market opportunities as the energy sector evolves and global power demand grows, especially for low-carbon energy alternatives. The SEG group was created because CPP Investments’ scale, flexibility and long-term horizon align with the energy and power industry’s dynamics, allowing us to better access attractive investments. The group holds a diversified portfolio primarily comprised of long-term tangible assets, including renewable energy sources such as wind, solar and hydro, as well as conventional power, upstream oil & gas, energy midstream, carbon capture and Liquefied Natural Gas (LNG). It also invests in areas of innovation, technology and services to the energy industries and manages agriculture investments. SEG had approximately $18 billion in assets as at December 31, 2020.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At December 31, 2020, the Fund totalled $475.7 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

So what is this all about? Basically, CPP Investments is consolidating its entire energy group under one umbrella -- the Sustainable Energy Group (SEG) -- a new investment group that combines the organization’s expertise in renewables, conventional energy and new technology and service solutions. 

SEG's mandate is very clear: to generate compelling investment opportunities for the Fund, positioning CPP Investments as the leading global energy investor.

Recall, late last year, CPP Investments established Renewable Power Capital (RPC), a European renewable energy platform based in the UK, and appointed Bob Psaradellis to act as CEO of RPC.

The RPC team has tons of great experience and is already ramping up. Earlier this year, it made its first investment by committing to the acquisition of a 100% ownership interest in a 171MW portfolio of onshore wind projects from OX2, a leading developer and constructor of large-scale onshore wind power in Europe, in a transaction valued at €245 million.  

Last week, it announced it has entered into a 50:50 joint venture (“JV”) with Benbros Solar S.L. (“Benbros”), an experienced Spanish photovoltaic developer, to develop 14 solar energy projects across Spain.  Through the partnership, RPC and Benbros will work together on a portfolio of 3.4GW across the projects located within the regions of Andalucía, Extremadura, Castilla la Mancha, Aragon and Murcia. 

 There's no doubt that RPC will be a major player in the European renewable energy space.

The Sustainable Energy Group (SEG) will look above and beyond that space, however, to invest across the energy spectrum where market opportunities lie. 

And that includes conventional energy too as well as new technologies that will disrupt energy. 

Bruce Hogg will be leading this new group and it makes sense since he was the Managing Director of Power and Renewables and they decided he needs to take on more responsibilities.

As far as Deborah Orida, Senior Managing Director and Head of Real Assets at CPP Investments, she is very clear in her statement:

“The energy sector is one of the most important enablers of the global economy and is composed of a wide spectrum of suppliers from conventional to renewable. Along our unique investment horizon, we see a dramatic opportunity to invest in, and support, the evolution and innovation occurring across the sector. CPP Investments is exceptionally well placed to be among the winners, in part through our partnership model alongside companies willing to grasp the future and forge ahead.”

CPP Investments is basically taking a holistic and comprehensive approach to energy to make sure it capitalizes on all opportunities from conventional to renewable and anything in between.

I think this makes perfect sense and it will be harder for critics to criticize CPP Investments' high-carbon approach because now it's all going to fall under the Sustainable Energy Group (SEG).

Notice the name "sustainable energy" which also includes conventional energy.

If you ask me, very smart of CPP Investments to do this, one group dealing with all energy matters.

Lastly, today I read something Mona Dajani posted on Linkedin, namely, that the world is adding record new renewable energy capacity in 2020:

Global renewable energy capacity additions in 2020 beat earlier estimates and all previous records despite the economic slowdown that resulted from the COVID-19 pandemic. According to data released today by the International Renewable Energy Agency (IRENA) the world added more than 260 gigawatts (GW) of renewable energy capacity last year, exceeding expansion in 2019 by close to 50 per cent.

IRENA’s annual Renewable Capacity Statistics 2021 shows that renewable energy’s share of all new generating capacity rose considerably for the second year in a row. More than 80 per cent of all new electricity capacity added last year was renewable, with solar and wind accounting for 91 per cent of new renewables.

Renewables’ rising share of the total is partly attributable to net decommissioning of fossil fuel power generation in Europe, North America and for the first time across Eurasia (Armenia, Azerbaijan, Georgia, Russian Federation and Turkey). Total fossil fuel additions fell to 60 GW in 2020 from 64 GW the previous year highlighting a continued downward trend of fossil fuel expansion.

“These numbers tell a remarkable story of resilience and hope. Despite the challenges and the uncertainty of 2020, renewable energy emerged as a source of undeniable optimism for a better, more equitable, resilient, clean and just future,” said IRENA Director-General Francesco La Camera. “The great reset offered a moment of reflection and chance to align our trajectory with the path to inclusive prosperity, and there are signs we are grasping it.

“Despite the difficult period, as we predicted, 2020 marks the start of the decade of renewables,” continued Mr. La Camera. “Costs are falling, clean tech markets are growing and never before have the benefits of the energy transition been so clear. This trend is unstoppable, but as the review of our World Energy Transition Outlook highlights, there is a huge amount to be done. Our 1.5 degree outlook shows significant planned energy investments must be redirected to support the transition if we are to achieve 2050 goals. In this critical decade of action, the international community must look to this trend as a source of inspiration to go further,” he concluded.

The 10.3 per cent rise in installed capacity represents expansion that beats long-term trends of more modest growth year on year. At the end of 2020, global renewable generation capacity amounted to 2 799 GW with hydropower still accounting for the largest share (1 211 GW) although solar and wind are catching up fast. The two variable sources of renewables dominated capacity expansion in 2020 with 127 GW and 111 GW of new installations for solar and wind respectively.

China and the United States were the two outstanding growth markets from 2020. China, already the world’s largest market for renewables added 136 GW last year with the bulk coming from 72 GW of wind and 49 GW of solar.  The United States installed 29 GW of renewables last year, nearly 80 per cent more than in 2019, including 15 GW of solar and around 14 GW of wind. Africa continued to expand steadily with an increase of 2.6 GW, slightly more than in 2019, while Oceania remained the fastest growing region (+18.4%), although its share of global capacity is small and almost all expansion occurred in Australia.

Highlights by technology:

• Hydropower: Growth in hydro recovered in 2020, with the commissioning of several large projects delayed in 2019. China added 12 GW of capacity, followed by Turkey with 2.5 GW.
• Wind energy:Wind expansion almost doubled in 2020 compared to 2019 (111 GW compared to 58 GW last year). China added 72 GW of new capacity, followed by the United States (14 GW). Ten other countries increased wind capacity by more than 1 GW in 2020. Offshore wind increased to reach around 5% of total wind capacity in 2020.
• Solar energy:Total solar capacity has now reached about the same level as wind capacity thanks largely to expansion in Asia (78 GW) in 2020. Major capacity increases in China (49 GW) and Viet Nam (11 GW). Japan also added over 5 GW and India and Republic of Korea both expanded solar capacity by more than 4 GW. The United States added 15 GW.
• Bioenergy: Net capacity expansion fell by half in 2020 (2.5 GW compared to 6.4 GW in 2019). Bioenergy capacity in China expanded by over 2 GW. Europe the only other region with significant expansion in 2020, adding 1.2 GW of bioenergy capacity, a similar to 2019.
• Geothermal energy: Very little capacity added in 2020. Turkey increased capacity by 99 MW and small expansions occurred in New Zealand, the United States and Italy.
• Off-grid electricity: Off-grid capacity grew by 365 MW in 2020 (2%) to reach 10.6 GW. Solar expanded by 250 MW to reach 4.3 GW and hydro remained almost unchanged at about 1.8 GW.

This press release is also available in Arabic (عربي), Chinese (中文), French (français), German (Deutsch), Japanese (日本語), Russian (русский) and Spanish (español).

This is an important press release which reminds us this is a critical decade if we are to slowly transition to a carbon neutral economy.

It also shows you where tangible progress is being made and Asia is taking the lead (maybe CPP Investments will expand its renewables platform there if they find the right group to partner with).

But I caution my readers, renewable energy isn't taking over conventional energy any time soon,  we need to be patient and our large pensions need to remain actively engaged with conventional carbon based energy companies.

There simply is no way around this and CPP Investments is right to create a group that will look at investment opportunities across the energy spectrum.

Below, despite COVID-19 pandemic, more than 260GW of renewable energy capacity added globally in 2020, beating previous record by almost 50%. More than 80 per cent of all new electricity capacity added in 2020 was renewable, with solar and wind accounting for 91 per cent of new installations.

Sustainable investing has long been a focus for OMERS, but never have environmental, social and governance (ESG) issues been as front of mind as they are today. Climate change is one of the most pressing issues of our time and represents both risks and opportunities for financial markets. As investors, we play a role in supporting accelerators of the transition to a lower carbon economy and across OMERS we have made a commitment to become a leader in Sustainable Investing.

Demonstrating that commitment, last year we undertook the organization’s first total portfolio carbon footprinting exercise based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The exercise measured the carbon footprint across our investments and allowed us to assess our total portfolio through the lens of climate change. The results of the study can be accessed in our Annual Report and on our website along with our commitment to reduce the carbon intensity of the portfolio by 20% by 2025.

Setting an ambitious, but tangible, short-term goal is critical to ensure our approach remains fit-for-purpose and that today’s leadership is accountable. The complexities of climate change and its impacts means companies must evolve their strategy to stay ahead of the curve. We are committed to engaging with our portfolio companies on how they are facing this challenge.

We will continue to partner with like-minded institutions around the world to exchange information, evolve sustainability practices and advocate for better transparency. This includes participation with initiatives such as TCFD, the Sustainability Accounting Standards Board and organizations like the Investor’s Leadership Network (ILN) and the Canadian Coalition for Good Governance (CCGG).

This commitment is significant, but our investment culture is already geared to take on the challenge. Applying an ESG lens – among others - to our investment decisions is already an integral part of how we assess value and risk, and our teams will continue to do this as we also actively focus on balancing our portfolio through capital allocation to lower-carbon opportunities. We will continue to work closely with our portfolio companies to promote sustainable business practices and to support their transition to a low-carbon economy.

We all have a role to play in delivering a more sustainable future. Factoring the risks posed by climate change into our investment decisions is essential to ensure that we continue to generate stable returns for our members over the long-term. We have made this commitment because we know that integrating ESG factors into our investment approach is a key part of delivering value for future generations.

Late this afternoon, I had a quick chat with OMERS' President and CEO Blake Hutcheson on this new target. More on our conversation below.

First, OMERS has made a commitment to reduce the carbon intensity of its portfolio by 20% by 2025.

In doing so, it joins CDPQ, BCI, OTPP  and other large Canadian pensions which have set similar targets.

What I like about this goal is 2025 is right around the corner, which tells me they're very serious about delivering on their target and have have a clear vision and path of how they're going to deliver on this promise.

As Satish Rai explains:

Demonstrating that commitment, last year we undertook the organization’s first total portfolio carbon footprinting exercise based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The exercise measured the carbon footprint across our investments and allowed us to assess our total portfolio through the lens of climate change. The results of the study can be accessed in our Annual Report and on our website along with our commitment to reduce the carbon intensity of the portfolio by 20% by 2025.

He also mentions that this is being done to address the risks and opportunities of climate change.

It's important to note that OMERS already takes sustainable investing very seriously. 

In fact, Satish Rai posts a letter on the website stating this on sustainable investing:

The world is changing and so is our role as an investor. Charged with the stewardship of our members’ retirement futures, it is a role we take to heart. Thinking long into the future we seek out the highest quality assets around the globe - those responsible, sustainable businesses and services that think about, and are built for the future.

Climate change is one of the most pressing issues of our time, and we see the world transitioning to a lower-carbon economy. The pace and scope of this transition will largely be determined by governments and communities, as well as by innovation and technology. As investors, we play a role in supporting accelerators of this change and are partnering with our portfolio to find opportunities to evolve business practices and grow sustainably.

Across OMERS we have made a commitment to becoming a leader in Sustainable Investing. We made that same pledge within our Oxford Properties portfolio several years ago and are now the gold standard amongst real estate peers worldwide ranking #1 in North America in the office/retail sector by GRESB (Global Real Estate Sustainability Benchmark) for six of the last seven years. Oxford is also building Canada’s first two zero-carbon office towers and has committed to make a 30% reduction in carbon emissions from its global property portfolio by 2025. With this blueprint in hand, we are actively working across our portfolio, ensuring that the values we believe in are integrated into every aspect of our investment approach. And we’re on our way, anchored by a strategy that will see us grow our investments in clean energy, beyond our more than $3B in the sector currently.

OMERS is involved in a number of institutional investor collaboration efforts focused on ESG and climate change issues. We believe that by collaborating with both our portfolio as well as other institutional investors, governments and regulators, we can have a greater influence and impact. As signatories to The Task Force on Climate-related Financial Disclosures (TCFD), we believe that more transparent disclosure of climate risks will assist us in continuing to make thoughtful decisions as our portfolio shifts and grows. Over time, climate change-related financial disclosure practices and metrics will evolve to provide a better understanding of the long-term impact of climate change on our investments and on our ability to deliver the returns required to meet our pension promise to members.

Finally, leadership in sustainable investing requires a nimble mindset to adapt to emerging issues. We continually advance our capabilities and practices to deepen our knowledge of Sustainable Investing and come to work every day ready to act in the best interest of our members.

Now, late today, I had a brief chat with Blake Hutcheson, OMERS' President and CEO.

Let me thank him for calling me back to quickly go over some of the important issues pertaining to this commitment of reducing the carbon intensity reduction in their portfolio by 20% in 2025.

Here are the important points he shared with me:

• Last year, OMERS undertook its first total portfolio carbon footprinting exercise based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). "We set out target reduction date at 2025 to make it tangible for all our employees."
  
• But even before they undertook their carbon footprinting exercise, OMERS was already spearheading change in its portfolio. Blake told me he spent 10 years as head of Oxford Properties and under his watch, they became a leader in sustainable investing. "We had a dedicated team that was set up 10 years ago focusing on sustainable investing and we quickly became leaders consistently ranking high on the Global Real Estate Sustainability Benchmark (GRESB) and 90% of our buildings have achieved an industry-leading green building certification for their region and asset class." (see Oxford's Sustainability Report here).
• Importantly, Blake added this: "It's a win, win, win. A win for our clients, a win for our investors and a win for our employees and it pays dividends over the long run."
• In Infrastructure, he mentioned Bruce Power which they own 50% of and it provides 35% of the energy to Ontario (clean energy). He also mentioned OMERS important investment in Leeward Renewable Energy (see my coverage here).
• I asked him about Private Equity where they have investments in 20 portfolio companies and he explained their sustainable investment policy applies to all their public and private investments. 
• He told me Michael Kelly who is OMERS Chief Legal & Corporate Affairs Officer also chairs the Sustainable Investing Committee which oversees OMERS approach to matters such as environmental, social and governance (ESG) integration in its investing activities. Katharine Preston who joined OMERS two years ago as Vice President, Sustainable Investing reports to Mr. Kelly. In her role, she assists OMERS with evolving its sustainable investing practices and liaises with OMERS investment, risk and communications teams on matters such as ESG integration, climate risk, and stakeholder communications and reporting (she's great, met her two years ago at a conference in Mont-Tremblant). 
• Blake also told me OMERS is part of the the Investor’s Leadership Network (ILN) which is taking the lead on sustainable investing. He spoke highly of Charles Emond, CDPQ's CEO who is the co-chair at the ILN CEO Council (along with Jean Raby) and said this is an important organization to bring about critical change to sustainable investing (see my recent conversation with Charles Emond  here).

 Alright, I think I covered the more important points of our conversation. 

Once again, I thank Blake for speaking with me on such short notice, always enjoy his insights.

The only thing I asked Blake was to have a dedicated YouTube channel for OMERS where they post great videos I can embed in this blog. You can view some of them on their website here.

By the way, that's the same message I have for all the CEOs at Canada's large pensions, start posting more interviews of yourselves, your senior managers, managing directors and employees on a dedicated YouTube site. We are 2021, the younger generation isn't into reading, they want video content.

And no excuses please, part of good pension governance is excellent and timely communications, it requires some effort to make these videos but it pays to be ahead of the curve on communications.

Alright, let me wrap it up there.

Below, a short clip where Oxford Properties' CEO Michael Turner discusses the future of the office:

Our President Michael Turner on the future of the office from the @PropelbyMIPIM Leaders' Perspectives Summit. Find the full talk here » https://t.co/8aI1LeRdT0pic.twitter.com/Winh8pBcBp

— Oxford Properties Group (@OxfordPropGroup) March 31, 2021

Great insights. You can see the entire clip here (registration is free).

I also embedded a recent responsible investing panel discussion hosted by Amundi and Nuveen which I found extremely interesting. Take the time to watch this as it covers ESG investing across all asset classes and the panelists provide great insights.

Just remember what Blake Hutcheson told me: ESG investing is a win, win win for all stakeholders and it pays long term dividends.

The technology and software sector continues to be a goldmine for the world’s biggest and best performing private equity firms. Add KKR & Co., cofounded by billionaires Henry Kravis and George Roberts, to the list of mega-firms set to mine one of its great dealmaking coups in the tech sector.

AppLovin, a pioneering maker of software for mobile gaming application developers, is poised to go public at a valuation of about $30 billion, according to a report fromReuters. AppLovin has set its IPO range at between $75 a share and $85 a share, and is looking to raise $2 billion by selling 25 million shares.

For KKR, which invested $400 million into Applovin in July 2018 out of its flagship KKR Americas XII Fund, the looming IPO will yield a home run investment.

According to AppLovin’s S-1 filing, KKR’s funds hold over 110 million AppLovin shares. An IPO at the midpoint of AppLovin’s range would create an investment worth over $8 billion. That should yield an astronomical investment rate of return for KKR, which harkens back to the glory days of the buyout industry.

Investors are absorbing the initial public offerings of software companies at sky high multiples of about thirty-times revenues. Public shareholders, even mutual fund firms that invest in growth stocks at a reasonable price, have seen successes like DocuSign or Salesforce and are willing to underwrite years of future growth. That’s because opportunity for software businesses abounds. Industries across the economy are moving their internal infrastructure, marketing, and product development onto software platforms. And new digital-first industries like mobile gaming and app-based e-commerce infrastructure are among the fastest growing subsections in today’s economy.

The technological changes are leading to companies with financials like Applovin, which saw revenues surge 46% to $1.45 billion in pandemic-plagued 2020. Total debt prior to AppLovin’s IPO stands at $2.1 billion, however, the company plans to repay about $400 million in debt through the offering. Adjusted earnings before interest taxes, depreciation and amortization was $345 million in 2020. Investors appear to be prepared to pay over 20-times sales and about 100-times trailing EBITDA to hitch their fortunes to AppLovin’s growth prospects. 

For KKR, a firm renowned in the 1980s for leveraging and breaking up companies trading at massive discounts to their assets, software deals mark an evolution. The firm’s Menlo Park-offices now house dealmakers chasing fast-growing technology companies and raising funds targeting growth-equity investments. That an investment in an app developer sits inside KKR’s flagship private equity fund speaks volumes to the changes afoot in private equity.

KKR isn’t alone in finding the surging sector to be an area of enormous opportunity. Software-focused private equity firms like Thoma Bravo have made billions on software deals in recent years, monetizing enormous profits for limited partners even during the Covid-19 economic disruption. Forbes recently analyzed how Blackstone Group’s push into software and technology-enabled investments was yielding strong returns.

Founded in 2011, AppLovin started as a company helping mobile game developers find and monetize users. In recent years, it has pivoted into a fast-growing software platform for the industry. It recently struck a deal to acquire German analytics company Adjust for $1 billion, comprised of nearly $600 million in cash and the remainder in convertible securities. It’s also spent recent years organically building Lion Studios, a soup-t0-nuts platform for developers to market their games and find new users.

For cofounder Adam Foroughi, the IPO will mark a major success. AppLovin’s S-1 filing attributes 27 million Class B shares to Foroughi, which could be worth over $2 billion at the midpoint of its IPO range. Herald Chen, the former KKR dealmaker who led the firm’s wildly successful AppLovin investment, left to join the company as its president and CFO in November 2019. Some 4.6 million AppLovin shares are attributed to to Chen in its S-1 filing.

While public stockholders may now clamor for his shares, Foroughi had a hard time finding startup capital on Sand Hill Road a decade ago when creating the business. Ultimately, the lack of capital was a blessing in disguise. It forced AppLovin to focus on cash flow early on and eventually led the startup into the buyout portfolio of KKR.

Says Foroughi in AppLovin’s S-1:

When we founded AppLovin in 2011, we thought our vision for solving the mobile app discovery problem was exactly the kind of big idea that every venture capitalist would love. Maybe it just wasn’t the right timing, but not a single VC chose to invest with us after countless meetings. At AppLovin, we love a challenge, and rather than being discouraged, we were motivated. We knew that mobile apps were changing the world, and that the importance of the app ecosystem would only increase. We believed that if we could help developers get their apps discovered by the right end users, we would build a meaningful business that would simultaneously better the lives of consumers around the world.

Without venture capital, we committed to profitable growth from Day 1.We remained intensely focused on the things that mattered most—our people, our products, and our technology. Every dollar and every resource were allocated with care. Looking back, we have had positive cash flows from operating activities each year since 2013 and we still treat every dollar like it is our own.

Our lean, entrepreneurial approach means that we can make fast decisions, be flexible and creative, and deliver more value for our customers. We keep our technology at the core of everything we do and are always thinking about what comes next. While we have grown significantly over the years, we have maintained this hungry, smart, and focused culture—a culture that is embedded in our DNA. This approach has fueled our success to date and will continue to carry us into the future.

Sounds like KKR is about to hit a grand slam (not a home run) with this AppLovin deal and its investors in its flagship KKR Americas XII Fund are going to reap some great gains too.

There's an important shift going on in private equity, the focus is increasingly on funding growth equity.

In fact, Myrian Balezou of Bloomberg reports that private equity’s taste for tech spurs $80 billion deal spree:

Private equity firms are barreling through the records as they place bets on technological revolutions in sectors ranging from finance to health care.

Firms have spent $80 billion acquiring companies in the global technology sector this year, according to data compiled by Bloomberg. That’s an all-time high for a quarter and already up 141% on this point in 2020, which went on to be a record year for such deals.

This month alone has seen Thoma Bravo ink a $3.7 billion acquisition of fintech outfit Calypso Technology Inc. and Ontario Teachers’ Pension Plan agree to take a majority stake in Mitratech, a provider of legal and compliance software, in a $1.5 billion deal.

In Europe, TA Associates said it would take over Dutch enterprise software firm Unit4 NV in a $2 billion-plus transaction, while one of Insight Partners’s portfolio companies bought data management group Dotmatics Ltd. for as much as 500 million pounds ($690 million). Earlier this year, Montagu Private Equity agreed to acquire U.K. software developer ITRS Group Ltd. for about $700 million.

Buyout firms are flush with investor cash and are being drawn to startups helping companies to reinforce their businesses following the impact of the Covid-19 pandemic, according to Chris Sahota, chief executive officer at tech-focused advisory boutique Ciesco.

“2021 will be a time of reinvention for many companies and digital technology is driving that, so the private tech market is booming,” he said. “After last year’s turbulence, businesses want to be agile and they have started to future-proof their operations.”

Bidding Wars

Competition for tech assets among buyout firms has been fierce. The sale of Dotmatics was completed in just three weeks, according to people familiar with the matter, while Montagu moved quickly with a high bid to beat out rivals and secure its purchase of ITRS, another person said, asking not to be identified discussing confidential information.

In the public markets, Bain Capital and Silver Lake Management were behind competing offers in the near $7 billion tussle for U.S.-listed laser maker Coherent Inc. Bain has pledged financial support to winning bidder II-VI Inc., while Silver Lake had backed Lumentum Holdings Inc.

Adding another element of competition for private equity firms chasing deals in the sector is the proliferation of special purpose acquisition companies. SPACs raise equity to fund takeovers of private companies and have been drawing in record amounts of investor capital. Backed by financiers and moguls from across industries, many are targeting tech deals.

SPACs are showing up in PE technology auctions as a real alternative bidder, although the SPAC market correction of the past few weeks could bring more realistic valuations, said Madhu Namburi, global head of technology investment banking at JPMorgan Chase & Co.

“Sometimes in bidding, private equity firms are struggling to match on valuation,” Namburi said about auctions involving SPACs. “SPACs are being aggressive but I haven’t seen PE firms have a lack of discipline.”

Among the most sought after assets are software firms, which account for $49 billion of companies acquired by private equity groups in the tech sector this year, the Bloomberg data show. Those like Calypso that offer a so-called subscription-as-a-service model are proving particularly popular, said Nandan Shinkre, managing director and European head of technology at Jefferies Financial Group Inc.

“It makes it easy to predict what the year is going to look like for these companies, hence buyers being comfortable paying forward multiples,” said Shinkre, whose bank worked on the Calypso, Dotmatics and ITRS transactions.

Elsewhere, growth capital continues to flow into tech startups, driving valuations. This month the payments processing group Stripe Inc. became the most valuable U.S. startup at $95 billion, following fresh funding from the likes of Sequoia Capital. Cybersecurity platform Snyk Ltd. has seen its valuation quadruple to $4.7 billion since the start of 2020.

“What’s becoming clear is that the returns from that investment opportunity is looking really attractive as a lot of tech companies are going public and creating a lot of value,” JPMorgan’s Namburi added.

Dizzying prices of tech companies in the public markets, meanwhile, have made take-privates harder to pull off and led to fears of a new sector bubble two decades after the dot-com crash. But Shinkre doesn’t see an immediate shift in momentum.

“I don’t anticipate a correction in equity valuation for good quality assets,” he said. “We now have more international interest than ever before in European tech companies, which shows how global the pool is. I believe this trend is here to stay.”

Jefferies is the top adviser to private equity firms on tech acquisitions by value this year, according to Bloomberg data, followed by Evercore Inc. and Barclays Plc.

What is going on? On one hand, we are repeatedly being warned that valuations in growth companies are off the charts. 

Indeed, as the Visual Capitalist shows here, Private Equity's appetite for growth deals has ballooned the valuations on all their deals:

On the other hand, Private Equity is increasingly focused on growth because of structural factors:

• We live in a low growth/ low rate world, you need to pay a premium for growth'
• The pandemic has accelerated the digitization of the economy. Companies have no choice but to spend to money on their digital platform and adapt or they will not survive.

That's why the focus is on software companies. 

By the way, the same thing is going on in public markets where software shares (IGV) have rallied well above their pre-pandemic level:

But investors I talk to are more reticent of getting their tech exposure through public markets.

Last week, I spoke with CDPQ's CEO Charles Emond who told me this to explain their outperformance in Private Equity last year (20.7% vs 9.9% for the benchmark) because of their exposure to healthcare, services and technology:

"We prefer having tech exposure in Private Equity as opposed to chasing the FAANG names higher and higher (they invest in them) because we have a seat at the table and are able to have more control over our investment."

He added: "I tell my depositors, don't look at it as Public and Private Equities, look at it as Equities and when you do this, you'll see it in a more comprehensive way and that we delivered great results."

It makes sense as technology exposure in private markets when you co-invest with strong partners (Blackstone, KKR, Silver Lake, Thoma Bravo, etc.) is where you can reap great gains and have a more meaningful stake in a company.

The big canary in the coalmine is whether or not we are reaching the top of the tech market and what will happen if rates start climbing back up?

Clearly large PE funds aren't worried, they're in bidding wars for top deals but as we all know, private equity needs strong public markets to exit their investments, and a strong IPO market is essential for these growth companies:

Last year, IPOs and hyper-growth Cathie Wood stocks (ARKK) were all the rage.

This year, I'm not so sure, risk appetite for hyper-growth/ IPO shares will remain as elevated but with the Fed out of the way and basically backstopping growth stocks and risk-taking activity, maybe it will come back strong.

I don't know, everything across public and private markets seem so bloody expensive to me, and that includes housing.

Either you hold your nose and play the game, bidding assets up to wazoo, or you sit it out and wait for a big fat crash that may or may not come.

All I know is elite hedge funds and private equity funds don't seem too worried and they're all chasing growth stocks and private companies up.

Their investors are enjoying the ride but they're increasingly nervous as valuations reach record levels.

Lastly, take the time to read this Wall Street Journal article on why Blackstone's Jon Gray is shifting that organization's focus on growth, not value as it barrels toward the trillion-dollar asset goal.

It's really hard betting against Jon Gray and other PE titans focused on growth right now.

But when everyone is positioned toward growth, I start to worry.

Below, in an era of near-constant disruption, what investment themes is Blackstone most excited about for 2021 and beyond?  In episode two of Morgan Stanley's new series, Exceptional Leaders / Exceptional Ideas, Jonathan Gray, President and Chief Operating Officer of Blackstone sits down with Michael Cyprys, Head of U.S. Brokers and Asset Management Research, to dive into key megatrends in energy, life sciences and logistics, as well as Blackstone’s approach to innovation and building a culture of meritocracy.

Like I said, listen to Jon Gray, he's one of the best investors in the world and offers great insights in this interview. Watch it all as he also touches on frothy valuations in some of the most speculative companies in public markets and he discusses how Blackstone continuously strives to get the culture right to ensure it can remain a premiere asset manager in every respect.