U.S. stocks climbed to record levels and closed out Friday at their session highs as Wall Street wrapped up the week with solid gains amid rising reopening optimism.

The Dow Jones Industrial Average rose 297.03 points to 33,800.60, notching a record closing high. The S&P 500 gained 0.8% to 4,128.80, hitting its third straight record close. The tech-heavy Nasdaq Composite edged up 0.5% to 13,900.19.

Stocks linked to the recovering economy led the gains again amid the accelerating vaccine rollout. Carnival Corp rose 2.6% after getting two upgrades on Wall street amid pent-up demand and potential summer restart. General Electric climbed more than 1%. JPMorgan added 0.8%.

The blue-chip Dow climbed 2% this week, while the S&P 500 gained about 2.7%, posting its best week since early February. The Nasdaq rallied 3.1% over the same period as major technology names outperformed. Apple jumped more than 8% this week, while Amazon and Alphabet both gained more than 6%.

On the data front, the producer price index, which measures wholesale price inflation, jumped in March. The March PPI data showed a rise of 1.0%, compared with a projected increase of 0.4% from economists surveyed by Dow Jones.

Year over year, the PPI surged 4.2%, which marks the largest annual gain in more than nine years.

“Inflation in the pipeline keeps heating up,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “We’ll see to what extent companies are beginning to pass this on to consumers next week with CPI. From what I’m hearing from companies, that process is just beginning.”

The 10-year Treasury yield ticked slightly higher to 1.66% following the inflation data. Treasury yields had retreated earlier this week from their recent highs.

Market volatility has declined significantly as the S&P 500 kept grinding higher to refresh its record high. The Cboe Volatility Index, known as the VIX, has been trading under the 20 threshold for eight sessions straight. The index looks at prices of options on the S&P 500 to track the level of fear on Wall Street. The VIX fell under 17 Friday.

“Contrary to headlines, rising interest rates, healthy levels of inflation, and an eventual Fed rate hike are not necessarily market negatives,” Larry Adam, chief investment officer at Raymond James, said in a note. “In fact, the annualized performance for the S&P 500 has been above average under each of these dynamics as long as economic growth remains robust — which we believe will occur.”

Investors largely shrugged off an unexpected jump in jobless claims from last week. The Labor Department reported first-time claims for the week ended April 3 totaled 744,000, well above the expectation for 694,000 from economists surveyed by Dow Jones.

Federal Reserve Chairman Jerome Powell called the recovery from the pandemic “uneven” on Thursday, signaling a more robust recovery is needed.

Alright, it was another solid week for stocks led by gains in the technology sector:

In fact, this week, the S&P Technology ETF (XLK) which is made up 40% of Apple and Microsoft made a record new high:

And the short-term charts on Apple (AAPL) and Microsoft (MSFT) remain bullish even if they're a bit overbought, so this tech momentum can continue: 

Of course, it's not just Apple and Microsoft, it's a broader tech rally led by tech mega caps like Amazon, Facebook, Google and even the hyper-growth ARK stocks, all of which spurred a strong rally in the Nasdaq-100 ETF (QQQ):

I have several theories:

• Tech shares languished in March. As we ended the quarter, I believe elite hedge funds took some profits in cyclicals (financials, energy, industrials) which did very well in Q1 to add to their tech holdings (data will be made public on May 15th).
• COVID variants are wreaking havoc in the US and around the world. A defensive strategy is to go back into big tech stocks, like big funds did at the end of Q1 last year.
• We are in a low growth/ low rate world, there's a premium being placed on growth in private markets and in public markets.
  
• Earning season is about to get underway and and many analysts are expecting this to be a positive catalyst for stocks.
• Lastly, the Fed reiterated this week that it will remain on the sidelines for a lot longer, focusing on its employment mandate and maintaining that inflation pressures are only transitory. Fed Chairman Jerome Powell will appear on “60 Minutes,” kicking off another week busy with Fed speakers.

For all these reasons, the bulls are bullish and to be honest, the path of least resistance is to just buy tech shares here knowing they have momentum on their side. 

A familiar refrain in markets is "buy the breakout", if stocks are making a record high, keep buying them.

And investors around the world have been buying global equities in droves recently:

Peak Euphoria: Stock Inflows In Past 5 Months Exceed Inflows From Prior 12 Yearshttps://t.co/NJ9JWa3Kmw

— Leo Kolivakis (@PensionPulse) April 9, 2021

In fact, inflows in global equities over the past five months have exceeded inflows over the last 12 years.

I know, with rates at record lows, there is no alternative (TINA) and investors are gripped with fear of missing out (FOMO).

Mix in there the new army of day traders this pandemic has created and elite hedge funds pumping and dumping all sorts of stocks, and you quickly realize why stocks garner all the attention.

But I'm reminded of what Doug Pearce, BCI's former CEO, once told me: "Risk management is most important when everything is going well."

With assets ripping higher and higher as everyone chases yield, you need to be cognizant of mounting risks.

Like what? Like how much leverage is being used to drive asset prices higher and higher and what happens if something goes wrong?

For example, we all know what happened at Archegos, but think bigger, a lot bigger!

I'm convinced elite hedge funds leveraged their "long small caps trade" (IWM) to the tilt:

I can't prove it but I know for a fact they all went short small caps/ long big tech when the pandemic first hit and then quickly reversed course to go long both, leveraging both trades as much as possible.

Leverage has a bigger impact on small caps and you can see it in the chart above, they have rallied well above their pre-pandemic levels.

If I'm a risk manager, I'm paying close attention to small caps, including small cap value stocks (not just growth) because they're the most vulnerable here to a major correction.

What else? Reuters reports that someone made a big $40 million options trade bets on near-term stock market tumble:

A massive trade in the U.S. options market on Thursday appears to be betting that the calm enveloping U.S. stocks in recent weeks will give way to a big rise in volatility over the next three months.

One or more traders laid out a roughly $40 million bet that the Cboe Volatility Index - often called Wall Street's fear gauge - will break above the 25 level and rise towards 40 by mid-July, trading data showed Thursday.

The VIX closed at 16.95 on Thursday, its lowest close since February 20, 2020, just before the coronavirus pandemic spooked investors and roiled global financial markets.

Some 200,000 of the VIX July 25 - 40 call spread traded over the course of two hours on Thursday, starting at 10 a.m. The trades made up about a third of the average daily trading volume in VIX options, according to Trade Alert.

The trades involved the purchase of the spread's lower strike calls for an average price of about $3.37, partly funded through the sale of the higher strike calls at about $1.30 per contract.

For the trade to be profitable, the VIX would need to rise above 25 by mid-July.

Given that big rallies in the options-based index tend to come during turbulent periods for stocks, the trade could represent a bearish outlook for equities.

The S&P 500 closed at a record high on Thursday helped by a rise in technology and other growth stocks

To be sure, this trade might not be directional, it might be part of a big hedging strategy of a large fund that is very long the market, but it gives you an idea of how nervous big investors are here.

I'm also paying close attention to last year's darlings struggling in this market, like Tesla (TSLA), NIO (NIO), solar (TAN), biotech (XBI) and of course, ARK Innovation (ARKK) and Chinese internet (KWEB) stocks:

"fubo TV (FUBO) up big today as it gets exclusive streaming rights to the Qatar World Cup 2022. Stock is recovering a bit after a big drop over last three months but I did notice the top holders as of end of Q4 2020 are all the prime brokers involved in the Archegos fallout. Just pointing that out"

FUBO shares closed up 13% on massive volume, off their high and they are still well off their 52-week high. When I see all the same prime brokers that helped Archegos lever itself up to insanity as top holders of this stock, I get nervous (it might be a coincidence but this stock is hyper volatile).

Now, so what? Who cares about last year's darlings? As long as the FAANG stocks and tech stocks in general keep grinding higher, as long as banks keep going up, the overall market is just fine.

True, and let me be clear, the path of least resistance in the near term is to bet on stocks making new record highs led by technology shares.

But the purpose of this comment, as stated in the title, is to talk about risks in this record setting market.

On that note, enjoy your weekend, don't worry, Fed Chair Jerome Powell will say something nice on "60 Minutes" to ramp up futures by Monday's open.

Below, CNBC's "Halftime Report" team discusses the economic outlook, markets and more with Mark Yusko, CEO and CIO of Morgan Creek Capital.

Listen carefully to Yusko, he's not a cheerleader, he's someone who understands very well that liquidity drove these markets up to dizzying highs and that the recovery won't be as strong as everyone expects. 

I also embedded the Salt-N-Pepa song that inspired me to write this comment (time just flies by!). Enjoy the music as long as it plays but just remember, when the music stops, these markets are going to get clobbered again.

The investment arm of the Canada Pension Plan is restructuring its largest group by assets, according to internal memos, marking the fund manager’s first substantial changes under newly appointed chief executive officer John Graham.

The Canada Pension Plan Investment Board is also revising its senior ranks, with at least three managing directors departing.

Total Fund Management is CPPIB’s largest group by assets and oversees macro portfolio strategy for the fund manager’s public markets division. The group is overseen by chief investment officer Ed Cass and was created last fall by merging Total Portfolio Management, which had $180-billion under management, with the fund’s Balancing and Collateral team.

Under the new restructuring, the memos say, the group will have five subdivisions, including portfolio design and active investment management. Total Fund Management will also revise its staffing level, which is likely to affect about 25 per cent of its employees, or about 30 people. The changes will include departures and internal transfers.

CPPIB is also making changes at the managing director level and has internally announced the departures of Kevin Bespolka, who oversaw the macro strategies group within its public markets arm, and Nick McKee, who was head of financial institutions for direct private equity.

Earlier this week, CPPIB also announced that it is forming a sustainable energy group that spans renewables and conventional energy and will have $18-billion in assets. As part of the merger, managing director Avik Dey, who was head of energy and resources, will leave the fund.

The changes come a little more than one month into Mr. Graham’s tenure. He took over in late February from Mark Machin, who resigned when the fund manager learned he received a COVID-19 vaccination in early February in the United Arab Emirates.

In an e-mail, CPPIB senior managing director Michel Leduc wrote that while the changes were made shortly after the new CEO’s appointment, Mr. Graham had been leading an enterprise-wide assessment of the fund’s structure in recent years, and worked with other executives in doing so.

As part of this, CPPIB appointed Mr. Cass as its first chief investment officer last fall, making him responsible for decisions such as capital allocation between investment programs and balance sheet management. CPPIB has been preparing for its coming growth as a result of federal changes that will mean 20 million Canadians contribute more money to CPP annually.

Mr. Graham previously ran private credit investments, which is a 125-person team that manages $42-billion. CPPIB is Canada’s largest pension fund manager, with $476-billion in assets.

Earlier today, I had a chance to speak with Edwin (Ed) Cass, CIO of CPP Investments. I'd like to thank him for taking the time to talk to me and thank Michel Leduc and John Graham (who suggested I talk to Ed) for arranging this call.

Ed Cass has huge responsibilities at CPP Investments and what I like about him is even though he's very intelligent, he has a great sense of humor and is fun to talk to.

First, let me cover this article above, it was obviously leaked by someone to the Globe and it needs to be placed in proper context. 

As Ed explained. CPP Investments started its active management program in 2006.

"So, we went from zero active in 2006 to 80% actively managed now and we needed to address gaps in terms of allocating capital across assets and strategies. That required a change in roles, responsibilities and accountabilities and this is why we restructured our team."

About three years ago, a group was created to look into how these gaps would be addressed and out of that group came the creation of the CIO position which was announced last September.

As Ed explained, it's more of a "relative value" group looking at systematic risks across assets and the 30 different global strategies and allocating capital dynamically across strategies and assets (maybe his title should be 'Chief Risk Allocator').

Nothing has changed in terms of reporting lines, the heads of each investment group "act like the CIOs of their investment activity" and still report to John Graham.

"Our group does not focus on individual deals (security selection), the Real Estate, Infrastructure, PE groups do that, we focus on allocating capital to strategies and assets where there are opportunities and where we can get the highest risk-adjusted returns."

He added: "We use factor investing and risk targets to redeploy capital where opportunities lie."

Of course, to do this, Ed Cass and his team have regular dialogue with the individual teams to assess where opportunities lie. "We don't force them to deploy capital but we have five-year targets. For example, our Real Estate group has been mostly selling over the last two years. We redirect capital to where risk exposures offer the most compelling risk-adjusted returns."

This isn't an easy job, in fact, it's downright difficult.

CPP Investments is managing close to $500 billion across 30 different global strategies but one thing Ed did mention is they always remain focused on the long term. 

Still, even when you adopt a long term view, things can change materially in any given year. 

He gave me the example of Fixed Income where rates collapsed last year. "They have come back this year but the the risk free rate for long bonds is now 2-2.5% whereas steady state is 3-3.5%."

Interestingly, we got to talking about the inflation-deflation debate and he told me he doesn't hold firm views either way but when John Graham asked him recently what keeps him up at night, he replied "rates".

He expanded: "We might get cost-push inflation or the secular stagnation scenario you're worried about but either way, there will be a lot more volatility in rates."

He went on: "I guess inflation will hurt us in the short run if rates spike up but longer term, we can capitalize and lock in those high rates if they rise high enough."

He said many of his peers are not as fortunate because their pensions are a lot more mature and "they're path dependent."

I asked him if he was referring to base CPP (partially funded) versus additional CPP (fully funded) and he said "both" as in both cases inflows are very strong for many years swamping what they need to pay out ("additional CPP is still in its infancy").

In terms of knowledge sharing, I found it interesting when he explained that CPP investments' thematic investing team doesn't report to him. Instead, he said there is a group internally at CPP Investments that gets key insights from each investment team, aggregates it and makes it "easily accessible" to all the teams.

"There's a tremendous amount of information circulating, we try to break down the silos and focus on total fund performance."

As you can appreciate, Ed Cass and his team are continuously incorporating a lot of information to make sure the Total Fund Management approach at CPP Investments is working well and that capital is being deployed in areas that offer the best long term risk-adjusted returns.

Going forward, the Total Fund Management team will play an increasingly critical role in how assets are deployed across strategies at CPP Investments. 

In fact, Ed told me the traditional 60/40 stock/bond portfolio is not producing the required return nor will it going forward, so active management including total portfolio management is more important than ever.

Like I said, it's not an easy or enviable job, but Ed Cass and his team are up for the challenge.

Of course, I plugged myself and Mihail Garchev, BCI's former head of Total Fund Management, who put together a great series on my blog last year (see Part 6 on capability here).

I didn't mince my words: "CPP Investments is Canada's biggest and most important pension fund, you should hire the best talent across the country and outside the country, and let them work remotely if needed."

In related news, CPP Investments' CEO recently told Barbara Shecter of the Financial Post that divestment is off the table under his watch:

The new chief executive of the Canada Pension Plan Investment Board has no plans to institute a blanket divestment of oil and gas assets during his tenure, in part because he believes science will find solutions to many of the issues that have made environmentalists and some investors question such holdings.

“Simple divestment is essentially a short on human ingenuity,” John Graham told the Financial Post in a recent interview, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.

“We’ve taken the position that we invest in the entire energy ecosystem, and we do not pursue a path of blanket divestment,” he said.

Invoking science to support energy investments may not be a popular position in some quarters these days, but the 49-year-old, who was abruptly named to the top post at the $475 billion fund in February, has the credentials to back it up.

A research scientist for more than a decade, Graham has a PhD in chemistry from the University of Western Ontario, as well as an MBA from the University of Toronto’s Rotman School of Management.

Navigating the political minefield around energy investments will be one of the key challenges Graham faces as head of the investment platform for Canada’s national pension scheme, which has mandate to “maximize investment returns without undue risk of loss.” Like other large institutional investors, CPPIB is facing criticism not only from environmentalists but from academics who are quick to point out that fossil fuels, no matter how lucrative now, represent risk.

But Graham is not taking sides.

On Tuesday, CPPIB announced that two existing investment groups — energy and resources and power and renewables — will be rolled into a single $18-billion platform called the Sustainable Energy Group to build on investments in renewables, conventional energy and innovation through new technologies and services.

“We will continue to invest across the entire energy ecosystem including active investments we have in Alberta,” Graham said in the interview, which took place shortly before the announcement.

Among those investments is Calgary’s Wolf Midstream, which he pointed to as an example of what he sees as the path forward.

The company, which CPPIB first invested in six years ago, is involved in the conventional oil and gas sector. But Wolf also built and owns the 240-kilometre Alberta Carbon Trunk Line, which captures industrial emissions from fertilizer facilities and refineries and delivers the carbon dioxide to use in enhanced oil recovery at mature oil and gas reservoirs and for permanent storage.

“It is one (investment) we’re quite proud of — a great example of some of the forward-looking thinking around carbon capture,” Graham said.

“I’ve met lots of people through my career, scientists and engineers, who work in the oil and gas sector, and they’re incredibly bright, talented people who will undoubtedly play a role in the energy transition.”

Graham is the second consecutive executive with a science background to lead the investment management team for Canada’s national pension scheme. His predecessor, Mark Machin, was trained as a medical doctor before turning his attention to high finance. Machin resigned from his job as CEO of CPPIB suddenly in February after it was revealed that he had travelled to the United Arab Emirates and been vaccinated against COVID-19 while those his age in Canada were still awaiting inoculation.

While Machin only worked as a doctor for about a year before moving into the world of investing at Goldman Sachs, Graham worked for several years as a researcher in the innovation group at Xerox, before transitioning to a strategy role at the technology company.

He had begun to work on his MBA when a headhunter came calling and lured him to CPPIB. He started in portfolio construction before moving into private investments and credit. As he moved up the ranks, his application of the scientific method was evident.

Take his decision in 2018 to move all CPPIB’s credit investors into a single department, a shift he describes as deliberate and methodical.

Before then, what had become one of the largest global asset classes was being managed within regional departments and asset class groups such as real estate, with a district focus on investment grade versus non-investment grade assets.

Graham’s view was that a broader lens across geographies and assets would help CPPIB capitalize on the opening of less-developed credit markets in China, India and Latin America, where there were fewer such silos or distinctions.

“We think of credit as an investment in credit, and really have built this department that can do public, it can do private, it can do corporate, it can do real estate, it can do structured credit,” he said. “The investment teams will build a portfolio with the best opportunities.”

The investment management organization won’t set “hard” allocations for specific asset classes, Graham said, adding that he will rely on chief investment officer Ed Cass when it comes to assessing macro-economic factors such as interest rates to determine portfolio construction and capital allocation.

While Graham’s ascent to the top job in February was abrupt, given the circumstances, he was far from a dark horse and had been on a very short list of possible successors to Machin since last summer, according to sources with knowledge of the succession planning.

His experience on the credit side of investing is understood to have worked in his favour, given the growing prominence of private debt alongside the sometimes flashier world of private equity. A person with knowledge of the pension management organization’s inner workings said Graham worked under seasoned fund veterans such as Cass and Mark Jenkins, who spearheaded CPPIB’s $12-billion acquisition of major credit platform Antares Capital, and was recognized as a smart and disciplined investor who also possessed a combination of strong leadership skills and strategic sense.

Graham is one of three CPPIB executives on the board of Antares, which was purchased in 2015. He described the in-house investment process that drove that acquisition as a guide to what can be expected under his leadership. Perhaps not surprisingly, the two-year process was methodical — it involved identifying a promising market segment and its key players, the writing of a research paper to back the investment thesis, and then careful observation.

“We watched the market…. When GE went to sell Antares, in many ways we’d already done all the homework,” he said. “We knew it was the market leader, we knew it was the platform we wanted to buy, and the organization was able to move (with) speed. And it’s been a fantastic investment for us.”

Indeed, Antares has been a phenomenal investment for CPP Investments.

As far as divesting from oil and gas, I'm with John Graham and his team, it's not the best long term approach and the organization was right to create the Sustainable Energy Group headed by Bruce Hogg to look at energy opportunities along the energy value chain.

Below, Deborah Orida, senior managing director and head of real assets of CPP Investments, joins BNN Bloomberg to discuss the pension's interest in renewables and clean energy as they create the Sustainable Energy Group. She says they are investing around the world and that they are well positioned for the consolidation in the conventional energy space. Watch it here if it doesn't load below.

The Investment Management Corporation of Ontario (IMCO) today announced that the weighted average return of its clients’ funds was 5.4% (net of all fees) for the year ended December 31, 2020. Client returns ranged from 0.2% to 7.1%, reflecting broad differences in their respective asset mixes, risk tolerances, and investment objectives. IMCO also met its consolidated return benchmark index for the year, as assets under management rose to $73.3 billion.

“We delivered solid results and met our benchmark, even as we implemented new investment strategies and managed through the volatile investment environment created by COVID-19,” said Bert Clark, President and Chief Executive Officer.

“Our approach is disciplined. We focus on those things that generate better risk-adjusted returns for our clients over the long-term,” he continued. “That means avoiding large asset class over weights, ensuring adequate liquidity to navigate times of market stress, and managing costs effectively.”

Throughout 2020, IMCO introduced new strategies for each asset class, which led to a complete overhaul of certain categories, such as public equities and public market alternatives. Transforming other asset classes, including real estate, is underway.

“Our clients are already benefiting from these new strategies,” said Clark. “For example, private equity and global credit both delivered double digit returns and significantly outperformed their benchmarks. Transforming our real estate portfolio will take longer.”

IMCO also focused its investment activities in 2020 by reducing its external manager roster by approximately half, eliminating costly fund-of-funds structures, and establishing new strategic partnerships.

“There will always be external managers with unique investment capabilities, so we are actively building partnerships with those best-in-class investors,” said Clark. “We have also built internal capabilities that enable us to significantly reduce costs on behalf of our clients.”

Notwithstanding the continued growth in internal investment, risk management, and enriched client service capabilities, IMCO exceeded its cost savings’ target for the year by 25% as it continued to provide its clients with tailored investment solutions and access to asset management capabilities, which they could not replicate on their own at the same cost.

More details on IMCO’s 2020 performance can be found in the 2020 Annual Report. 

ABOUT IMCO

The Investment Management Corporation of Ontario (IMCO) manages $73.3 billion on behalf of its public sector clients. IMCO’s mandate is unique as it is the only purpose-built organization to deliver investment management services to broader public sector institutions in Ontario. In addition to creating better access to a diverse range of asset classes and investment opportunities, IMCO delivers portfolio construction advice and sophisticated risk management capabilities to its clients.

As a non-share capital corporation, IMCO delivers services on a cost recovery basis. It is an independent organization, operating at arm’s length from government and guided by a highly experienced and professional Board of Directors.

For more information, visit www.imcoinvest,com or follow IMCO on LinkedIn and Twitter @imcoinvest.

Earlier this afternoon, I had a conference call with Bert Clark, President & CEO, and Jean Michel, CIO, to go over IMCO's 2020 results.

Before I get to our discussion, I want to go over the 2020 Annual Report (feel free to scroll down to my discussion with Bert and Jean but I recommend you read the preliminaries).

I read it cover to cover this morning right when it appeared and loved it. 

And I'm not just saying this to flatter them, it was very well written, very transparent, informative and contained all the information I needed to go into my virtual meeting with Bert and Jean very well prepared.

So, please take the time to read IMCO's 2020 Annual Report, it's well worth it.

Let me begin by going over 2020's highlights:

It's important to underscore that IMCO is a major Canadian pension fund that has just completed major shifts in strategies and is still in the process of diversifying its legacy portfolio.

Effectively, IMCO has undergone major transformations since its inception, especially over the last three years as Bert Clark and Jean Michel implemented their new strategies, hiring the right people and bolstering everything from risk management to front, middle and back office systems.

I would encourage my readers to read all the previous annual reports here to really understand the transformations that took place there since 2017.

Next, let me move on to Brian Gibson's (the Chair) report (pages 10-11):

I would like to acknowledge the entire IMCO team and my fellow board members for their dedicated response to a particularly challenging year. The events of 2020 will not fade from memory soon. The investment team ably steered our clients’ portfolios unharmed through the March market volatility and the rest of the year, and everyone at IMCO continued to focus on creating long-term value for our clients.

The Board worked with management in 2019 and early 2020 to ensure that strong liquidity and risk management practices were in place. These efforts were well timed. We were prepared to navigate the financial market difficulties in the spring, when COVID-19 panic roiled global markets. Equally important, IMCO continued its full operation after health protection measures cleared the office.I was impressed with how employees and management transitioned to the remote working environment and maintained a “can-do” attitude. IMCO’s business continuity program functioned exactly as it was designed to. We could not have predicted the nature or extent of the pandemic, yet we were well prepared for a crisis.

Board members were routinely briefed on liquidity and risk throughout the spring. We met more frequently than normal, by video, to assess ever-changing circumstances. During this time, the Board welcomed a new director, Eric Wetlaufer, who is a seasoned investment management executive. We also said farewell to Hugh Mackenzie, who had served on the IMCO Board since inception. I would like to thank Hugh for his valuable contributions and good advice.

BUILDING A TRACK RECORD

The organization achieved several “firsts” in 2020. It was the first year that client assets were managed according to investment strategies developed by IMCO. So, for the first time, this annual report includes a consolidated one-year investment return and total portfolio benchmark. We firmly believe that long-term results matter more than short-term performance, and we have started to build our track record. The investment results were equal to our benchmark, a solid and satisfactory result given the extensive portfolio restructuring that occurred during the year.IMCO launched its first investment pool in 2020, the IMCO Canadian Public Equities Pool, with approximately $3.5 billion in assets. This was an important step in advancing our mandate to provide public sector institutions with world-class, cost-effective investment management services. Pools for other asset classes will follow in 2021. (At time of writing this annual report, IMCO had launched the IMCO Global Public Equities Pool and the IMCO Emerging Markets Public Equities Pool. This means IMCO has pooled approximately $26.8 billion of the aggregate AUM in its public market pools.)

The pandemic, along with widespread demands for equality and social justice, highlighted the growing need for investors to focus on environmental, social and governance (ESG) matters. IMCO’s staff did important foundational work on ESG and sustainability in 2020. This included consulting with the Board and other stakeholders about priority areas, establishing a clear governance structure and developing an ESG strategy. The Board approved this strategy as part of IMCO’s updated Responsible Investing policy.

I would like to thank IMCO’s management and employees for their dedication and skill in steering investments and managing risks for clients, despite the daily distractions of a global pandemic. This was truly a job well done in difficult circumstances. It is to your credit that IMCO achieved its goals for the year and is positioned to create value for our clients in 2021.

Let me just pause here to remind my readers that like other large Canadian pensions, IMCO is an independent, investment management organization that operates at arm’s length from government and its members. 

It is guided by a highly experienced, professional board of directors, one of the best board of directors in the world with tons of experience working at large pensions and other great organizations:

I can tell you, just Brian Gibson, Bob Bertram and Eric Wetlaufer's experience at OTPP and CPP Investments alone is worth its weight in gold, but if you read the bios of all the board of directors, these are extremely qualified and experienced individuals guiding this organization through an important growth phase during these uncertain times.

By the way, did I ever tell you my favorite Bob Bertram story? He was CIO at OTPP in 2008 (before he retired) and I put in a call to him to get his views on the meltdown. This was in the thick of the financial crisis when asset prices were collapsing and I remember asking him if they're buying the dips.

I'll never forget what he told me and the concern in his voice: "Oh, we bought the dips and the market keeps going lower, we are done buying the dips here."

For all you youngsters who never lived through the 2008 GFC, the 1999-2000 tech meltdown, the 1987 crash or the 1973-74 bear market, you might not understand the value of having people like Bob Bertram, Eric Tripp, Brian Gibson and Eric Wetlaufer on your board, but let me tell you, IMCO's members and management are very lucky to have such immense experience on this board (a bit intimidating but mostly reassuring to lean on their collective experience when the going gets tough).

Alright, let me move on to Bert Clark's CEO report to members (pages 12-13):

I am very pleased with the progress we made and the resilience of the IMCO team in 2020. Our investment results, which we are reporting for the first time, were strong in most areas, and the total fund return was in line with our benchmark. We delivered the services our clients need most: portfolio construction advice, opportunities to invest in diverse assets, and strong liquidity and risk management. We also exceeded our cost-savings target and advanced multi-year programs that will improve client service.

GROWING OUR ASSETS

IMCO’s consolidated net investment return was 5.4 per cent in 2020 and assets under management stood at $73.3 billion. Assets were augmented with the addition of $420 million in assets from the Provincial Judges’ Pension Plan, which became a new client in the spring.

Our portfolio performance was equal to our benchmark return of 5.4 per cent, and we are proud of this result in a volatile and unpredictable year. We achieved double-digit returns in public equities, global credit and private equity. At the other end of the spectrum, our retail real estate assets were heavily affected by lockdowns and the abrupt shift to shopping from home.

We were able to navigate the COVID-19 pandemic because we had previously put in place robust measures to manage liquidity. Managing total portfolio liquidity to avoid being a “forced seller” and to be able to take advantage of buying opportunities is one of the keys to long-term investment success. Our clients had sufficient liquidity throughout 2020 to meet their needs, and our investment leaders were able to put money to work during the market disruptions. We expect those new allocations will deliver positive results over the long run. It is sustainable performance that matters to our clients, and our investment teams take a long-term view.

We monitor key trends that will influence markets over time. One is the rise in importance of environmental, social and governance (ESG) considerations in investment decisions. ESG issues such as climate change and diversity are important to IMCO, our clients and other stakeholders. Our teams integrate ESG considerations in our due diligence process to manage risk, and in the ongoing search for investments.

RESILIENCE

In the face of a global pandemic, IMCO did not waver or alter course. We made significant progress on all our multi-year programs, which are designed to elevate our processes, systems and teams in order to better serve our clients.

For example, several years of work culminated in the milestone launch of IMCO’s first structured pool of assets, the IMCO Canadian Public Equities Pool, in November, with assets of $3.5 billion. Before being able to launch, we had to build out our investment and risk management teams, develop new investment strategies which launched on Jan. 1, 2020, and do detailed operational work on the architecture, governance and legal frameworks needed to pool assets.

We updated clients throughout the year on market developments, advised them on asset mix and emphasized the importance of well-diversified portfolios. We also enhanced our interactions with clients’ management teams and their board investment committees.

EMPLOYEE WELLBEING

Employee wellbeing is an ongoing focus for us. We took steps to support our employees in trying times. We offered a virtual care package, webinars on navigating stress and change, COVID-19 information sessions and wellness sessions.

We take pride in offering an inclusive work environment. We updated our Inclusion and Diversity Statement in 2020, reviewed human resource policies and program guides with a lens on inclusion and diversity, and conducted unconscious bias training for senior executives and other staff.

DELIVERING VALUE

IMCO’s scale means we offer clients access to a comprehensive suite of investments at an efficient cost. We leverage our scale in negotiations with external managers, when co-investing alongside partners, and by internalizing some strategies and using lower-cost passive or factor-based approaches in certain market segments. Our investment teams developed important new relationships with high-performing managers in 2020.

Our private market strategies, such as infrastructure and private equity, offer IMCO clients the ability to invest in private assets and debt, managed by leading global fund managers, at discounts to the rates these managers would charge smaller institutions.

We did well in managing our costs in 2020, exceeding by 25 per cent our target to achieve $10 million in cost savings.

When IMCO started out, our portfolio was heavily dominated by fund-of-funds and numerous externally managed funds. We refocused our roster of external managers, trimming the roster from 200 to 124.

By focusing on the critical aspects of investing – ensuring appropriate diversification, providing consistent access to liquidity, creating strong partnerships, and integrating ESG considerations (all at reasonable cost) – we continued to deliver value to our clients throughout 2020.

As I stated before, IMCO has refocused its portfolio to cut costs, manage liquidity and risks a lot tighter and add value and by diversifying across public and private markets through best in breed partnerships, effectively delivering value to their clients.

Who are their clients? The image below provides those details:

As you can read, IMCO has room to grow and attract new clients, and I highly encourage prospective new prospective clients to join this organization and have their pension managed by professional pension fund managers looking after their long-term interests.

Now, in terms of investments, there's an excellent discussion in the annual report which begins on page 26.

First, some context to keep in mind:

So, this annual report marks the first time IMCO has disclosed investment results across all strategies which explains why it's the first time I am covering their results on this blog.

And here are IMCO's 2020 net investment results by asset class:

A detailed discussion of each asset class is available starting on page 32 of the annual report.

A few key points:

• Public Equities underperformed their benchmark by 150 basis points (10.7% vs 12.2%). A historic overweight to value stocks explains the underperformance but emerging markets did come through nicely. Also, the one-time transition cost of exiting managers in Public Equities to cut costs over long run also impacted performance.
• The Fixed Income portfolio returned 20 basis points above benchmark (8.7% vs 8.5%) as government bonds rallied last March in a risk-off environment and the portfolio added much needed liquidity to IMCo's clients to capitalize on opportunities as they arise.
• Real Estate suffered the biggest losses last year, down 12.1% while its benchmark was down 7.4%. I spoke to Bert and Jean about this portfolio (see below) and basically they have a high exposure to Canadian Retail and Office (legacy portfolio) which got slammed last year as shutdowns took effect. The portfolio is being diversified away from Canada and into more multi-family and logistics but it's still a work in progress.
• Global Infrastructure gained 1.6% vs a -10.1% for its benchmark. "The portfolio’s heavy investments in energy and transport infrastructure led to low portfolio returns on an absolute basis. However, a combination of strong performance from telecommunications, utilities and clean energy investments, well-timed exits and structural protections in energy exposures resulted in strong performance relative to the benchmark."
• Public Market Alternatives (global hedge funds) gained 2.2% last year vs a benchmark return of 1.8%. Bert explained to me they exited costly fund-of-funds last year and the transition cost them but also implemented new strategies through a managed account platform that are doing well.
• Global Credit outperformed its benchmark last year by 500 basis points (11.1% vs 6.1%). The primary driver of this outperformance in 2020 was risk positioning. The year started out with credit being fully valued based on historical levels. IMCO’s portfolio was underweight credit risk and long duration, which benefited performance as risk sold off and interest rates declined. As credit markets began to recover, the team reduced portfolio duration to benchmark levels and added credit risk through new investments. 
• Lastly, Private Equity significantly outperformed its benchmark last year, 34.2% vs 9.3%, adding 25% of net value add. IMCO invests and co-invests with top funds in private equity funds and Bert explained to me they made great returns in their investment in Corsair Gaming which they invested in alongside EagleTree Capital. Corsair Gaming IPOed in September 2020 and the stock has since done very well (CRSR is symbol but IMCO's money was made at exit).

Discussion With Bert Clark and Jean Michel

Alright, it's time to end things off with my discussion with Bert and Jean.

I want to thank them for taking the time to talk to me earlier today and thank Neil Murphy for setting up this conference call. 

By the way, Neil Murphy, their VP Corporate Communications, and his team worked hard on the annual report and I have to give them full credit just like I have to give Dan Madge (his counterpart at OTTP) and his team full credit for writing a great annual report there (it's not easy writing these reports).

Anyway, Bert started off by stating "he's very proud of his team" as they "didn't miss a beat" throughout this pandemic, ensuring "operational continuity" and "delivering above and beyond on their corporate objectives."

"This allowed us to get done what we needed to do and meet our clients' needs."

In our discussion, he highlighted several key drivers of long-term success:

• Ensure appropriate diversification across and within asset classes
• Managing all risks including liquidity risk very carefully
• Leverage IMCO's scale to keep costs as low as possible (internalize activities and partner with funds to add value but reduce costs through co-investments), ensuring higher net returns over long run
• Maintain focus on value add using all available tools including rebalancing
• Integrate ESG in all their investments to ensure they are practicing good stewardship and screening all their investments for ESG risks.

Bert told me he's "very proud of Jean and is team" as they "overhauled all asset classes" last year, cut costs, internalized activities, developed strong partnerships, launch new strategies, etc.

We did speak about Real Estate which he noted was "challenged" but he also noted a lot of work was initiated before the pandemic hit to reposition that portfolio:

• Strategic partnerships remains their focus. He noted they entered into strong partnerships with Breakthrough, Kingsett, Tishman Speyer, WPT Industrial Real Estate and Dermody Properties to invest alongside them into life sciences, multi-family and logistics properties.
• He said they are looking at all underperforming real estate assets "systematically, asset by asset" to see where they can add value by redeveloping them. 
• He noted, however, they're not in a rush and will do what is in the best interest of their clients over the long run.

I think that is wise. I told Bert BCI's QuadReal did a huge deal a couple of years ago with RBC Global Asset Management to diversify away from (a portion of) its Canadian real estate holdings but there are other options, including working with developers to redevelop properties in Canada to add significant value to them.

I'm looking forward to talking more about real estate with Andrew Garrett, Senior Principal, Real Estate at IMCO, on Thursday afternoon when I moderate a panel discussion on COVID impacted private markets at the Toronto CFA Society 2021 Pension Conference. 

What is clear to me is like others (CDPQ, OTPP, OMERS), IMCO had a challenging year in Real Estate as some assets got hit hard and this was to be expected but the pandemic also gives them an opportunity to reposition and diversify these portfolios so they are more solid over the long run.

As Bert noted, the pandemic accelerated trends that were already going on before, like the fall of brick and mortar and the rise of e-commerce, but it also added uncertainty in office space as companies moved their employees to working from home.

In Private Equity, as mentioned above, Bert told me they made great returns in their investment in Corsair Gaming through their partnership with EagleTree Capital (they co-invested with them in this company which subsequently IPOed, allowing them to realize great returns).

Jean Michel told me they favor strong strategic partnerships in public and private markets, calling it the "hybrid model" where you internalize whatever you can but work with partners to co-invest alongside them on bigger deals.

This is especially important in private markets as IMCO scales its activities all over the world:

Jean spoke to me about how they reacted last year when markets sold off hard in March and then snapped back:

• He said going into 2020, they were positioned defensively, focused on liquidity (added bonds) and told their Board they need to be ready to seize on opportunities as they arise. This was before the pandemic hit.
• So when March rolled around, they rebalanced their portfolio away from government and investment grade bonds into stocks and high yield bonds. "We were prepared before everything went south but obviously couldn't predict the pandemic and the intensity of the snapback rally."

Bert also mentioned the importance of rebalancing and stated they had an "all-start team" on their board of directors they can lean on for advice.

He stated: "They're a tremendous asset and have low egos, they literally told us things like 'we tired that and it didn't work' and were very  helpful during this tumultuous time."

As I stated above, IMCO's board of directors (both men and women) is an incredible asset in every respect, the senior managers and employees are lucky to have them there to lean on for advice when needed.

What else? I asked Bert and Jean whether leverage is an element of their liquidity risk management and they told me "not yet but we are looking into it and in discussions with clients and our board."

I believe it should be and Jean Michel has a lot of experience using leverage in an intelligent way (he brought back Air Canada's pension from the brink of insolvency and laid the foundations for Vincent Morin and his team at Trans-Canada Capital).

Jean Michel also has a solid  investment team at IMCO which has great experience and I'm looking forward to covering more of their activities going forward.

Lastly, I couldn't resist to ask both Jean and Bert their thought son markets right now.

We entered into a fascinating discussion on deflation-inflation (I can't help it, I love that topic) and the insane amount of central bank intervention into the global economy and financial markets.

Jean told me he sees reflation continuing over the next 12 months but longer term, he agrees with me that there are structural factors which are deflationary (demographics, high debt, inequality, technological advances, globalization, etc.).

He said this: "The big question is whether the economy can start spinning its wheels without central bank intervention and deflation remains their biggest concern going forward. Self-sustaining inflation is hard to see here."

Bert noted that "20 years ago, the Fed put out a statement and analysts would spend three days going over it word by word. Nowadays, the Fed's balance sheet is close to the size of BlackRock's assets under management."

Like me, Bert is concerned about all this intervention stating: "We are relying on them (central banks) to get it right but they're not all knowing and infallible, if an externality hits, it can hit markets hard."

And he also mentioned that in human history, there's no example where this amount of government intervention can sustain markets indefinitely: "It creates a misallocation of capital, asset and housing inflation but exacerbates inequality."

I couldn't agree more and we ended it on this fascinating discussion.

I really enjoyed talking with Bert and Jean, they're a pleasure to talk to and they have done a great job bringing IMCO to whee it is now. I thank both of them for taking the time to talk to me.

Going forward, I look forward to covering IMCO in detail and once again, please take the time to read IMCO's 2020 Annual Report for more details.

As is customary, I end with a table of executive compensation:

I urge my readers to read the full discussion on compensation starting on page 67 and keep in mind, this is their first year where they report results.

More importantly, IMCO is very transparent in terms of its costs and posts this detailed table in its annual report:

They keep things simple, focus on asset mix, rebalancing, diversification, control costs and enter into long-term strategic partnerships where they can add value for their clients over the long run.

It's a great shop, one I highly recommend to prospective clients looking for a pension manager to manage their employees' pensions.

 Below, some highlights from IMCO's 2020 Annual Report:

We are pleased to share our 2020 annual results today. IMCO posted a solid 5.4% return (net of all fees), meeting our benchmark. Assets under management grew to $73.3-billion.

Learn more about IMCO’s performance here: https://t.co/73I2tpbnCtpic.twitter.com/lyuzw564zy

— IMCO (@IMCOinvest) April 13, 2021

Also, take the time to read this Bloomberg BNN article on IMCO's 2020 results:

Ontario’s new public fund manager is revamping its real estate portfolio, cutting its exposure to retail property, after suffering a 12.1 per cent loss on those holdings last year.

Investment Management Corp. of Ontario, the pension manager for government workers in the Canadian province, posted an overall gain of 5.4 per cent for 2020. Real estate losses were offset by strong returns from credit and stocks.

IMCO, which manages $73.3 billion, was created less than five years ago to consolidate several public sector funds under one manager. It’s still in the process of building its investment team and diversifying the assets it inherited.

The $10.2 billion real estate group is one example: It’s 79 per cent office and retail space, which performed poorly because of the pandemic. “We have a portfolio that’s, unfortunately, underweight logistics and multi-residential,” IMCO Chief Executive Officer Bert Clark said in an interview.

Rebalancing those holdings “is going to take time and a lot of hard work,” Clark said. “There are assets that we’re going to have to sweat.” IMCO has struck deals with firms including KingSett Capital Inc. and Dermody Properties LLC to invest in apartments and industrial properties.

IMCO is also planning to increase its exposure to global credit, which represents just 6 per cent of assets as of Dec. 31. That won’t necessarily come at the expense of government bond holdings, Clark said.

IMCO’s small private equity portfolio earned 34.2 per cent after the successful initial public offering of Corsair Gaming Inc.

Another bright spot for the fund was its ability to push cash into stocks after markets plunged in February and March last year, he said. The fund earned 10.7 per cent on public equities, more than double the total return of the S&P/TSX Composite Index.

“You can’t be a long-term investor if you don’t have your eye on liquidity,” Clark said. “In those dips you won’t be forced to sell, and in an ideal world you can actually be a buyer.”

I thought Bert gave a television interview today but it wasn't the case so I embedded an older Canadian Club interview with him from last year which is excellent and well worth watching.

Partners Group, a leading global private markets firm, has, on behalf of its clients, sold a large-scale portfolio of US industrial properties at a Gross Asset Value of over $1 billion.

The Portfolio has a combined leasable area of 8.6 million sq ft and consists of 88 industrial properties primarily located across the Mid-Atlantic and Southeast regions of the US, including Atlanta, Nashville, Norfolk, Raleigh-Durham and the Shenandoah Valley, near Washington DC. The properties include 74 light industrial buildings and 14 Class A bulk industrial buildings, which primarily serve distribution tenants in the e-commerce supply chain.

In line with the firm’s build-to-core strategy, Partners Group built the Portfolio by aggregating three separate lead investments, in partnership with Equus Capital Partners, located in five fast-growing US markets, offering unique exposure to attractive industrial assets in multiple geographic regions. At the time of the exit, Partners Group had executed its full transformational value creation plan, increasing occupancy levels to 98 per cent and executing lease renewals of key tenants; maintaining high average lease terms to a diversified, long-term tenant base; and enhancing the quality of the portfolio since acquisition by executing value-add development opportunities.

Since Partners Group’s original investment, an additional 750,000 square feet of space was added to the Portfolio. Demand for large-scale logistics and industrial real estate has accelerated since the onset of Covid-19, benefiting from structural tailwinds from the e-commerce sector. Partners Group created a unique opportunity for an institutional buyer to acquire a diversified portfolio of attractive industrial assets in a high-demand, low-volatility sector. The exit represents a return in excess of 2x for Partners Group’s clients.

Ron Lamontagne, Managing Director, Co-Head Private Real Estate Americas, Partners Group, says: “Partners Group built this portfolio of quality assets across attractive industrial markets, gaining exposure to key transformative trends, such as the rise of e-commerce and relatively outsized expansion of regional growth cities. We are proud to see the transformational results of the work we have done during the past three years and believe this exit represents an excellent outcome for our clients. We continue to see relative value in the industrial sector and, in particular, we have conviction in last-mile distribution facilities, smaller urban logistics warehouses and cold storage facilities, which are supported by resilient structural market trends.”

Jessica Wichser, Global Head Asset Management, Private Real Estate, Partners Group, adds: “This Portfolio generated strong demand from buyers due to its strategic geographic positioning, strong operating fundamentals, diversified tenant base and long-term tenant appeal. During our holding period, we navigated the Portfolio through market disruptions caused by the Covid-19 pandemic, and adopted an entrepreneurial governance approach that allowed us to execute on our transformational investment strategy and maximize potential cashflows, fueling the Portfolio’s growth and securing sustainable returns for our investors.”

Partners Group’s real estate business has a total of USD17 billion in assets under management and has invested USD20 billion in real estate opportunities since inception on behalf of its clients. Other notable transactions in 2021 include the acquisition of a portfolio of UK industrial properties for GBP253 million; the firm also made its first direct real estate transaction in Japan in five years in January, acquiring 24,000 sq m of Grade A office space near Tokyo.

Now, Partners Group didn't sell this industrial real estate portfolio for over $1billion because it thinks we are at the top of the market.

It sold because it's a fund, they wanted to realize on their investment and they made excellent returns, generating in excess of 2x for their clients.

They can move on to their next fund.

Global pensions are different in the sense that they will hold these assets for a lot longer but even they are willing to sell if the price is right.

Still, there's no denying industrial properties are all the rage right now and there are compelling arguments to believe this is a secular trend which can last for a while.

And it's not just industrial properties.

IPI Partners, LLC, a global investment platform focused exclusively on data centers and other technology and connectivity-related real assets, just announced the final closing of IPI Partners II, L.P. at $3.8 billion.

Now, we can argue whether data centers are infrastructure or real estate, all I'm doing is pointing out which sectors are hot right now and why secular winds are blowing their way.

Multifamily is also doing well because pandemic or no pandemic, people need to live somewhere.

Offices remain a murky but I suspect they will rebound once countries achieve herd immunity and people feel safe to go to the office.

What remains unclear, however, is whether the future of work will be a hybrid between working from home and working at the office.

For example, lawyers, accountants and other professional services might be forced to share an office with a colleague every other day as companies look to trim costs.

But I'm pretty optimistic that once we achieve herd immunity and more and more people will be comfortable going back to the office (with all precautionary health measures), we will see activity pick up there.

So yes, industrial properties will remain hot but the risk is this sector overheats while investors ignore more traditional sectors like offices and even retail (yes, retail!).

I think the most important thing global investors have learned from the pandemic is they need to really drill down across their portfolios to ensure there is appropriate sector and geographic diversification.

Below, GLP’s Ralf Wessel is confident that e-commerce will continue to drive demand and investment in logistic real estate after the company hit a record leasing year in 2020.

Second, Jon Gray, President and COO of Blackstone, on the real estate industry’s changing landscape from Goldman Sachs’ firm-wide virtual conference held last June.

Lastly, Bill Rudin, co-chairman and CEO of Rudin Management Company, joins "Squawk Box" to discuss the commercial real estate space and whether businesses will return to physical offices.

In February 2021, I was honoured to become the fourth CEO of CPP Investments after more than a decade with our organization. As I take on the responsibility of helping to protect the foundation of retirement savings of my fellow contributors and lead CPP Investments in its next chapter as a globally significant investor, I’d like to share with you some of my core beliefs and perspectives on leading this enduring institution.

Who I am and why I’m here

First, my outlook and approach are influenced by my training in science. In my early career, I was a research scientist in chemistry and nanotechnology. From that experience I learned the importance of preserving the time and space for deep thinking and complex problem solving. It was work I loved but CPP Investments offered something more: the opportunity to serve an institution that plays a vital role in people’s lives. I joined the organization in 2008. The sense of mission and purpose of this organization energized me then — and they still do today.

Why? Because being part of CPP Investments is about serving a purpose greater than yourself. The work we do matters. Hard-working Canadians rely on us to effectively manage the CPP Fund. All my colleagues at CPP Investments understand this responsibility and feel the urgency of earning your trust every single day. We operate in highly competitive markets and that means there is no room for complacency; our people are sharp and responsive.

In my years at CPP Investments, I’ve had a chance to work across a range of departments, including total portfolio management, private investments and eventually as Global Head of Credit Investments. I’ve also spent time working in our offices in London and Hong Kong. While you’ll never mistake cool and misty London for sub-tropical Hong Kong, I am struck much more by the shared values and culture in our global colleagues than by the differences. That’s true in every CPP Investments office around the world. No matter where you go in our organization, our strategists, analysts and leaders strive for excellence in all that they do. There are no short cuts. The responsibility of securing the CPP Fund for 20 million Canadians is too great for that.

My values and leadership style

Running a $475 billion global investment fund that takes a 75-year investment horizon makes three-dimensional chess look easy. We have multiple strategies and investment types, from investing in infrastructure in Asia to quantum computing technology in Silicon Valley. We also screen for material risks, including climate change and the risk that our biases might cloud our decision-making. All of that is to say that CPP Investments is a complex organization.

To make it succeed, we need the best possible thinkers. We are a knowledge organization. That is why we have doctors, scientists, digital technologists and others from non-traditional backgrounds. And yes, many of our team members come from finance. In general, though, I believe teaching a smart, driven person how to invest is a lot easier and yields much better results than trying to motivate an average investment specialist. All that interdisciplinary and diverse thinking can yield surprising — and valuable — insights.

We feel the same way about other kinds of diversity, whether it’s gender, ethnic or racial. We regularly ask colleagues at CPP Investments about their lived experiences, so that we can continually track our progress fostering inclusion, increasing diversity and measuring equity. Do colleagues have an opportunity to be their best selves and unlock their professional possibilities? Are we allowing them to experience an organization that supports, respects and values them as individuals, and their unique contributions? We will continue to embrace and value a multitude of backgrounds and viewpoints; doing so makes us better investors and strengthens the organization all around.

Looking ahead, you can expect that I will continue to strive to build a workplace that values innovation and collaboration. Just as CPP Investments has always done, we will look for opportunities to provide new learning experiences for everyone in our organization, whether it’s convening experts in new disciplines, spreading insights in one part of the Fund to the entire organization, or just providing the time and space for our team members to work through problems and pursue new approaches. My colleagues are the key to our success and supporting them is one of my most important responsibilities.

What to expect from CPP Investments under my leadership

What you can expect from CPP Investments moving forward is that we will continue pursuing our long-standing vision to be the best investment fund of our type in the world. Already, we are the investor of choice for talent, companies and partners in regions around the globe where we are valued not just for the size of our Fund but for the quality of our people, practices and high standards.

On a practical level, this means we will increasingly use data to inform our decisions and counteract biases; and we will leverage data-driven insights from across our portfolio as another edge to capture the greatest possible value for our beneficiaries. Our industry measures success by short- and medium-term financial performance, yet we have a long-term view. By all these measures we have excelled. The Fund achieved 10-year results of 10.8% (at Dec. 31, 2019) and in 2019 received confirmation from the Chief Actuary of Canada that the CPP continues to be sustainable for the next 75 years. Your pension is secure.

We adopt the most sophisticated practices and hone skill sets to actively invest the CPP Fund in the best interests of CPP contributors and beneficiaries. None of this is easy. We know that complex challenges are afoot and we are preparing.

Shifts in the world’s power structures and economic organization will have significant implications for investors. For example, the resurgence of populism, development of emerging markets and the rise of China have the potential to profoundly affect the global investing environment. Yet, climate change is arguably the most pressing factor affecting the investment landscape today. As the global economy moves towards net-zero, our goal is to capture the opportunities and hedge the undue risks that will arrive as society works to reduce and remove greenhouse gases from the real economy. The investment arena is becoming even more competitive and requires the constant pursuit of excellence in every part of the organization. These themes dominate markets today but some of them were barely perceptible twenty years ago.

Always guided by purpose

We hold ourselves accountable to you; and I hold our organization to account. Where we have set our sights as an organization is no secret. We have a clear vision to be the best fund of our type in the world and a strategy to get there. We have a defining public purpose that gives us a ‘why’ every morning. With that vision, strategy and purpose, we are on track to become a trillion-dollar Fund that will help to provide sustainable retirement security for you, your children and your grandchildren.

Like life, the markets and the global economy are always changing and there is always uncertainty. That is why I will regularly write to you with information and updates about the foundation of your retirement savings and the work we are doing to manage the CPP Fund in your best interests.

Thank you for trusting us.

Sincerely,
John

This is a very well written letter which actually should have received a lot more media attention.

Instead, I read nothing from the media outlets (The Globe should have published it).

There's a lot in here but this passage is especially critical:

[...] being part of CPP Investments is about serving a purpose greater than yourself. The work we do matters. Hard-working Canadians rely on us to effectively manage the CPP Fund. All my colleagues at CPP Investments understand this responsibility and feel the urgency of earning your trust every single day. We operate in highly competitive markets and that means there is no room for complacency; our people are sharp and responsive.

As I keep stating on my blog, pensions are first and foremost about people, not investments. 

The investment part is actually easy, you can buy stocks, bonds, real estate, infrastructure, private equity, private debt, hedge funds, commodities, etc. The part that matters most is linking it up to the people that are the ultimate beneficiaries from the decisions your pension takes.

That's true for all of Canada's large pensions but CPP Investments covers all Canadians so it understandably has to uphold the core values John Graham discusses above and be held accountable for its decisions.

On that note, I do have a minor remark to make publicly on John's comment. He states the following:

To make it succeed, we need the best possible thinkers. We are a knowledge organization. That is why we have doctors, scientists, digital technologists and others from non-traditional backgrounds. And yes, many of our team members come from finance. In general, though, I believe teaching a smart, driven person how to invest is a lot easier and yields much better results than trying to motivate an average investment specialist. All that interdisciplinary and diverse thinking can yield surprising — and valuable — insights.

We feel the same way about other kinds of diversity, whether it’s gender, ethnic or racial. We regularly ask colleagues at CPP Investments about their lived experiences, so that we can continually track our progress fostering inclusion, increasing diversity and measuring equity. Do colleagues have an opportunity to be their best selves and unlock their professional possibilities? Are we allowing them to experience an organization that supports, respects and values them as individuals, and their unique contributions? We will continue to embrace and value a multitude of backgrounds and viewpoints; doing so makes us better investors and strengthens the organization all around.

I totally agree, you need a diverse workplace and that also means people who are willing to think differently because they have different degrees or come from different backgrounds or have different life experiences.

One group, however, that I find is systematically underrepresented in the workplace is Canadians with disabilities.

It's actually criminal and here I'm not just pointing the finger at CPP Investments and Canada's large pensions, but all public and private organizations.

If it's one thing this pandemic has taught all of us is how to adapt and cope.

Canadians with disabilities have been adapting and coping long before the pandemic hit and they know all too well what it means to live in isolation, to feel excluded and marginalized.

Yet with technological advances, there are no more excuses for erecting barriers to this group, organizations can easily accommodate them, allowing them to work from home if needed.

My message is simple: gender, ethnic and racial diversity are all critical for any organization to thrive but it's high time we start focusing on the most disadvantaged groups in our society, especially the ones that have been systematically discriminated against for far too long.

I realize this will make some leaders uncomfortable. I've had open conversations with some of them on how difficult it is to attract and accommodate people with disabilities.

And I tell them all the same thing: "Nothing worthwhile is easy, try harder, you will become a stronger, more diverse and more inclusive organization."

At least John Graham is sending the right message, CPP Investments represents all Canadians, so it needs to "embrace and value a multitude of backgrounds and viewpoints" to make them better investors and strengthen the organization all around.

I just want to see that translate into concrete steps and hiring practices that go well beyond the customary "check the boxes" generic hiring practices.

In essence, if you really want to "embrace and value a multitude of backgrounds and viewpoints," you need to bomb your current HR hiring practices and rethink everything, including the conscious and unconscious biases you have in the way you review resumes and the way you interview candidates.

Not easy, for sure, most people don't like or embrace change, they want to continue doing the same thing over and over again.

But that's exactly Einstein's definition on insanity: "Doing the same thing over and over, expecting different results."

Anyway, the good news is John Graham isn't afraid to try new things and he understands the organizational complexities of running Canada's biggest and most important pension fund requires not just embracing diversity, but also embracing new ways of looking at things.

And that includes data which CPP Investments will increasingly use to inform its decisions and counteract biases and leverage data-driven insights from across our portfolio as another edge to capture the greatest possible value for our beneficiaries.

You should all read my recent interviews with John Graham and Ed Cass to understand their respective roles and responsibilities and how they work together and with their colleagues to deliver on their mandate. 

On that note, I realize it's Friday and I typically cover markets but as stocks keep making record highs and complacency is setting in, I remain worried that risks are not being priced into the market.

The best way I can describe it is that everything seems engineered by central banks and Wall Street to make it appear as if all is fine and we're on the cusp of incredible growth, but I have this sinking feeling that all this good news is already priced in and if something goes wrong, stocks are in big trouble.

Maybe I'm pessimistic because variants are wreaking havoc across Canada, especially Ontario that just imposed new COVID-19 restrictions, including increased police powers, restricting gatherings.

Of course, it's not just Canada and Ontario, these variants are all over the world, especially in countries like Brazil and India where vaccinations are slow and mutations are dangerous.

John Graham and his peers have a lot on their plate, least of which is this pandemic which poses all sorts of challenges to their global organizations.

I'm confident they will navigate these uncharted waters with the same professionalism that they exhibited last year, it's just not easy and it's getting long in the tooth for everyone, especially those anxiously awaiting their first jab.

Below, Brazil's P1 coronavirus variant, behind a deadly COVID-19 surge in the Latin American country that has raised international alarm, is mutating in ways that could make it better able to evade antibodies, according to scientists studying the virus.

“It’s still a race between the variants and the vaccine,” Amesh Adalja, a senior scholar at the Johns Hopkins Center for Health Security and a spokesman for the Infectious Diseases Society of America, told MarketWatch.

And Sebastien Page, T.Rowe Price's head of global multi-assets, on what investors need to know about asset allocation in today's market. Also, take the time to read Francois Trahan's latest market comment here, it's excellent.

Lastly, take the time to watch my favorite motivational speaker/ journalist, Kevin McShan, talk to Gail Swift about diversity and how to help students find their career path in life. 

There is a lot more in this than helping students, the interview can help HR offices rethink the way they recruit, screen and interview candidates. Trust me, it’s well worth watching.

Charles Emond has a unique perspective on the powerful role that capital can play in driving change. He is the president and CEO of Caisse de dépôt et placement du Québec (CDPQ), which has worldwide investments of more than (US) $291 billion, including in pension funds, insurance plans, and other organizations in Québec. Emond came to the role in February 2020 with a commitment to invest sustainably while generating returns and helping develop the economy of tomorrow.

As part of that commitment, Emond cochairs the Investor Leadership Network (ILN) CEO Council, representing the leaders of 14 global investment firms that want to help drive the transition to a more inclusive and sustainable low-carbon economy.

Emond recently spoke with McKinsey senior editor Diane Brady about his increased focus on addressing climate change and how that is shaping CDPQ’s investment strategy. An edited vesion of their conversation follows.

McKinsey: What inspired you to take on this leadership role at ILN?

Charles Emond: From the pure organizational perspective, this initiative is dear to our hearts. ILN is focused on concrete actions, giving investors tools to assess and incorporate climate risk into their portfolios. Here are the sectors that produce the most carbon and the levers that reduce it. As a portfolio manager, it helps you assess a company’s disclosure. Is it credible? Is it complete? Disclosure is absolutely key to making informed decisions. It helps to drive a conversation.

McKinsey: Your companies have invested in ESG [environmental, social, and governance] for years. What’s changed? 

Charles Emond: A CEO recently told me that, a year or two ago, ESG was the last question that would come up in [an investor] meeting, if there was time. Now those meetings start with that question. We have 42 depositors that care about these issues and trust us to manage their money. We have this commitment to be carbon neutral by 2050. To drive sustainable and inclusive growth, it’s helpful to have a grid and act accordingly.

To meet our commitment to be carbon neutral by 2050, we need to act now. In 2017, we really focused our climate strategy on three things. The first was increasing investments in low-carbon or greener assets by 80 percent. We doubled our target so that today we have about $26 billion in those assets. We’re one of the top investors in the world in renewables. The second target was reducing our carbon intensity by 25 percent by 2025. Today, we’re at 21 percent. The third was ensuring that leadership aligns with the low-carbon transition.

The team has annual carbon targets that impact their compensation. We give an ESG report to our depositors and the public. Instead of being a constraint, having these targets tied to compensation has become a source of pride.

It’s moved from being a “nice to have” to a “need to have.” For shareholders, it’s no longer peripheral. There’s a vast and growing number of people who demand it. Increasing low-carbon assets is easy. When we invest in a wind farm or light-rail transit, everybody applauds. Reducing carbon intensity can be trickier. The reality is that some sectors pollute more. We think it’s important that investors not run away from those problems but confront them and help companies transition to cleaner output. The question is how to do it. That’s why we’re measuring our impact not only from greener assets but also from helping the transition of the real economy underneath. You’ve got to have both.

McKinsey: What’s the outlook for the fossil-fuel industry in terms of attracting capital?

Charles Emond: Transition is the key word. We closely monitor sectors with high carbon emissions. As long-term investors, we are working to accompany companies on this important transition. We expect to see improvements and are helping them to identify more sustainable business opportunities and drive effective change.

McKinsey: How do you work with companies to help them make this transition?

Charles Emond: A few years ago, talking about emissions was like raising a sensitive topic to an old friend. Now that friend likely understands the importance. It’s no longer a conversation about the need to change but rather the pace of change. You can influence that through a dialogue with the management team. You can also use your votes, which speak loudly. We help them set targets and identify sustainable opportunities. We ask them to stop harmful practices, if there are any. And we tell them to improve disclosure.

In November of last year, we announced a new policy governing the exercise of voting rights for public companies. It targets 300 companies in our portfolio in about 28 countries. It sets our expectations in areas such as disclosing climate risk. We give people time to change, but it’s meant to have some teeth because the clock is ticking. So it’s a balancing act. We’re supportive, but we also provide what I’d call “healthy tension.”

McKinsey: Do you see this as a fiduciary duty or a moral duty?

Charles Emond: Whether you’re an investment manager, pension fund, or a portfolio company, if you don’t act according to these new standards, it’s going to impact your revenues. Increasing inequalities impacting minorities, younger people, and women will affect your long-term growth and our collective benefit. We’re not creating an ecosystem that sets winning conditions. It’s arithmetic. And this is the right thing to do.

McKinsey: Are you worried about climate change on a personal level?

Charles Emond: Yes. Absolutely. We believe the clock is ticking, and science is clear about that. I don’t need numbers to get worried, but they can get you even more worried. In Canada, the weather-related costs of the last decade alone are double the total cost of the past 30 years. And Europe’s got the hottest year on record. So it’s like compounded interest here. At some point, there’s going to be a limited ability to reverse this trend.

We’re managing the pensions of six million Québecers. We owe it to them and to future generations to invest in making this transition. Also, I have two kids. And even though they’re young, they’re sensitive to these issues.

McKinsey: What do you think is the role of regulation in addressing these issues and in driving the behaviors you want to see in your portfolio companies?

Charles Emond: You always need regulation. As Jean said, governments can help set up a framework so that behaviors adapt accordingly, or there’s an incentive to move in a certain direction. Then I think the private sector is sometimes better equipped to set that into action.

The voting policy I talked to you about spells it out. Our preference is to engage with companies, to lead by example and benchmark our own progress, to give investors relevant tools, and to endorse the behavior we’re looking for.

And that’s why we think that the climate-change initiative is so important, because it will speed up the use [of carbon-reducing tools.] Do I see a need for regulation? Yes. It’s part of the solution, but it doesn’t bring you to the final destination, in my mind. You need widescale endorsement of these objectives.

McKinsey: How should investors measure the success of their portfolios going forward?

Charles Emond: You’ve got to anchor it on principles, moving from capital to constructive capital. That means taking a broader view of investment. Depositors need solid returns over the long term, and factoring in climate change is part of that. Now there is another layer whereby you take a step back and say, “What is the impact that’s coming with our investing? Is that directionally positive? Is that in line with our core values?” These are all difficult things to measure, but there’s a sanity check on top of all of it at that end that is an important element.

McKinsey: If I’m a CEO of a company, what do I need to do to get more of your money?

Charles Emond: Well, I’d say get ahead of the curve. Show leadership in your industry and ambition that will bring in capital, and hence, good returns. When there’s an important trend, differentiate yourself. Best-in-class companies in every sector attract capital and differentiate themselves.

That’s about competitive positioning, which is a language that CEOs can relate to. The mindset is also shifting. The sales pitch needs to be less focused on the bad things that might happen if you don’t do something, and instead focus on the good things that could come if you do something.

There are a lot of possibilities out there. To me, it’s about showing leadership and conviction, not just checking the box because you have to. If we take climate change as an example, it is a factor that is here to stay and will become more and more material in the future. Whether we are talking about transition or physical impacts, companies that today are fully integrating the climate factor within their strategies to help identify opportunities and mitigate risks have a better chance to outperform in the future.

McKinsey: What is your message to CEOs?

Charles Emond: This train is not reversing. It’s here to stay, and it’s going to accelerate. We talk about that with leaps forward in technology. It’s also happening with climate and ESG. These issues are here to stay and may actually represent the biggest investment opportunity.

There’s a Venn diagram in which doing the right thing actually creates a good outcome. I think we’re at this juncture; this crisis probably made us realize a lot of important things at an important moment. We can’t miss this opportunity or let that momentum drop, because it will have an impact for generations to come. It’s a privilege to invest people’s money, but it comes with responsibilities.

This is an excellent interview with Charles Emond and I am happy he really got into it with McKinsey’s Diane Brady.

Notice the tone of the conversation? This is where we are going, the clock is ticking, we need better disclosure and actions now, this train is not reversing.

There's an urgency and seriousness to the discussion without being overly alarmist or sensationalist.

Moreover, unlike US public pensions caving into the politics of divestment, Charles Emond and his Canadian counterparts are clear, divesting out of fossil fuels is off the table, preferring instead a strong engagement with an action plan to measure success in sustainability over the long run.

Quite frankly, divesting out of fossil fuels is easy but it's stupid and shortsighted. It goes against the fiduciary duties of these large public pensions to maximize returns without taking undue risks and it only shifts the risk off to a private fund that probably doesn't care about ESG and impact investing.

Engaging with high carbon polluters means putting pressure on them to disclose emissions and to figure out ways to reduce them to achieve carbon emission reduction targets. 

This will also involve investing in new technologies to reduce emissions, something Leo de Bever recently discussed on my blog.

Late this afternoon, the first federal budget in two years was released in Canada, and as expected, the federal government promised more than $17 billion in climate change programs, much of it in the form of incentives to encourage heavy industry to curb their emissions and grow Canada’s clean technology sector (Michael Sabia pays close attention to Leo de Bever, which is a good thing!). 

But as Charles Emond and Jean Raby rightly note, governments can only help set up a framework, incentivizing companies to move a certain direction, but the private sector is better equipped to set that into action.

I don't just believe that for climate change, I believe it for all aspects of ESG investing, including hiring more people with disabilities which I touched upon on Friday when I discussed John Graham's letter to Canadians.

"Oh Leo, you make leaders uncomfortable when you talk about diversity and inclusion and how people with disabilities are systematically discriminated against."

And, so what? Let me make this crystal clear, this blog expresses my opinions and it's not just about pandering and praising Canada's large pensions or avoiding hard discussions.

And this blog is a powerful platform, I will give a voice to those who are unheard and have been systematically discriminated against. Period.

I strongly feel that Canada's large pensions and other large private and public organizations can do more to hire more women, blacks, ethnics, aboriginals, LBGTQ+ and especially people with disabilities at al levels of their organization.

Going from 0% of people with disabilities to 1, 2 or 3% is a step in the right direction. It won't be done overnight but with technology, there's simply no excuse for not hiring more people with disabilities.

It's like that panel discussion at the CFA Toronto's 2021 Spring Pension Conference last week which CN Investment Division’s CEO Marlene Puffer moderated featuring Donna Mathieu, VP, CIO and Treasurer of NAV Canada; Rachel Volynsky, CIO Mercer Delegated Solutions and Fiona Frick, CEO of Unigestion.

At one point they were talking about why more women are not being hired and someone said "it's because they're underrepresented in the CVs they receive."

As Marlene Puffer noted, "it's simply math", if you receive a stack of resumes and only 5% are women, no wonder more women are not being hired.

Similarly, if you receive a stack of resumes with zero people of disabilities, you will never hire a person with disabilities.

"Well, Leo, it's tricky, we can't treat people with disabilities the same way we treat other employees."

Excuse me? Would you ever dare say that to a black or gay employee? These are ridiculous excuses expressing strong and erroneous biases!  People with disabilities don't want to be treated differently because of their disability, they might ask for minor accommodations which is well within their legal right but most importantly, all they ask for is for equal opportunities at being hired/ promoted based on their abilities to deliver the same output.

Why am I bringing this up again? Because ESG investing is taking off, everyone is jumping on the bandwagon, including BlackRock and Vanguard, but like Charles Emond, I want to see this translate into concrete actions, not just in the "E" but the "S" of ESG. 

And that means benchmarking, taking a hard look within your own organization and coming up with a concrete action plan.

Alright, let me get something else off my chest. Le Devoir put out an article (in French) that more than $14 million was paid to CDPQ's senior managers in 2020 and that Charles Emond received a total compensation of $3.45 million. 

Last week, CDPQ released its Annual Report for the year ended December 31, 2020, titled Constructive Capital (the English version will be available this week).

In the French version, the media harped on executive compensation:

But as I keep reminding people,compensation is benchmarked to industry standards and it is primarily based on achieving long-term performance targets. 

And while CDPQ pays its senior executives very well, they're slightly underpaid relative to their counterparts in Toronto and it's not because of performance issues (not saying they're not being paid very well or up to industry standards, just calling it like I see it).

Quebec's media loves harping on executive compensation at CDPQ without giving proper context. I see the same thing in British Columbia where the media go after BCI's executives every year.

These are large sophisticated pensions investing across public and private markets, the work is grueling, the pressure is on to execute and deliver, and it's a very competitive market (banks, private funds, etc.), so they need to compensate their employees properly to attract and retain them.

If you're going to pay civil servant salaries, nobody is going to want to do these high stress jobs, and it will be reflected in the long-term results.

Alright let me wrap it there, think I've stated enough.

Remember to read my recent conversation with Charles Emond to gain more insights on his vision, strategy, focus on execution and how he likes to lead this important organization.

Also, today I read that CDPQ has acquired a 15% interest in the Indiana Toll Road (“ITR”) from a subsidiary of the IFM Global Infrastructure Fund (“IFM GIF”). Following completion of the sale, IFM GIF continues to own more than 70% of ITR:

The Indiana Toll Road is a 157-mile (252 km), limited access, divided highway in the state of Indiana which is operated and maintained under a Concession and Lease Agreement with the Indiana Finance Authority (“IFA”). The road spans northern Indiana, from its border with Ohio to the Illinois state line near Chicago, feeding directly into two toll roads at the state lines – the Chicago Skyway in the west and the Ohio Turnpike in the east. Since IFM’s acquisition in 2015, ITR has successfully undergone the largest capital improvements to its roadway and structures since its original construction (Project “PUSH” or “Pavement Upgrade for a Superior Highway”). The Concession and Lease Agreement grants the concessionaire the exclusive right to collect toll and other revenues from the toll road for the next 60 years. 

CDPQ and IFM Investors share similar objectives, having invested together across geographies in sectors such as ports, roads and energy.

“The success of this transaction demonstrates the high-quality nature of the ITR and the significant value adding initiatives that IFM Investors has undertaken since acquisition of the asset in 2015. We are delighted to welcome CDPQ, another like-minded, long-term partner into this key piece of U.S. infrastructure,” said Kyle Mangini, Global Head of Infrastructure at IFM Investors.

“ITR is a critical channel for the flow of goods in the United States whose resilience and importance for the logistics industry have been demonstrated in recent months. It will be as essential as ever as the economic recovery takes off,”said Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure at CDPQ.“We are delighted to once again team up with a business partner of IFM’s caliber to ensure the success of this high-quality asset.”

Another great infrastructure investment with a solid partner for Emmanuel Jaclot and his team.

Let me end with some good news. The CDC says fewer than 6,000 Americans have contracted Covid after being fully vaccinated:

U.S. health officials have confirmed fewer than 6,000 cases of Covid-19 in fully vaccinated Americans, Centers for Disease Control and Prevention Director Dr. Rochelle Walensky said Monday.

That represents just 0.007% of the 84 million Americans with full protection against the virus. Despite the breakthrough infections, she said the vaccines are working as intended.

“With any vaccine, we expect such rare cases, but so far out of more than 84 million people who were fully vaccinated, we have only received reports of less than 6,000 breakthrough cases,” Walensky told reporters at a press briefing. Breakthrough cases occur when someone contracts the virus more than 14 days after their second shot, she said.

The CDC chief acknowledged that the number could be an underestimate.

“Although this number is from 43 states and territories and likely an underestimate, it still makes a really important point, these vaccines are working. Of the nearly 6,000 cases, approximately 30% had no symptoms at all,” Walensky said.

“This is really encouraging encouraging news. It demonstrates what we’ve already discussed about these vaccines. They also help prevent you from getting seriously ill,” she said.

Out of the 6,000 or so breakthrough infections, 396 people were hospitalized and 74 people died, according to CDC data released last week.

Half of all American adults have received at least one dose of the coronavirus vaccine. Of those age 65 and older, 81% have received one dose or more and about two-thirds are fully vaccinated.

Remember to get your vaccine as soon as you can, it can literally save your life if you contract Covid.

I received my first jab late last week, Moderna's vaccine, and exhibited minor discomfort. The procedure is a joke, took 5 minutes, waited 15 minutes and left to go home but that night I felt off (mild flu-like symptoms), didn't sleep well as I was hot and my left shoulder was hurting (these reactions fully subsided after two days). 

The nurse reminded me I'm not fully vaccinated till my second (or in my case third) dose and to continue exercising extreme caution (no need to tell me, I hardly leave my house and we order our groceries online).

The point is the vaccine rollout in Canada is finally gaining steam and I urge everyone to stop listening to scary media stories and to go get vaccinated as soon as possible. Then, hunker down and wait, still following all public health guidelines.

Below, an interesting clip where McGill professor Henry Mintzberg  talks about why we need action on this pandemic, linking pollution to the spread of COVID-19. Take the time to watch this.

Ivanhoé Cambridge is proud to announce an ambitious program aimed at achieving net zero carbon for its international portfolio by 2040. As the real estate and construction sector accounts for nearly 40% of global greenhouse gas emissions, the company is accelerating its decarbonization strategy in light of the urgent need to address climate change.

The scope of this commitment covers all five continents where Ivanhoé Cambridge owns properties, either wholly or through partnerships*, comprising some 800 properties in a variety of asset classes: office and logistics buildings, shopping centres, residential units and hotels.

“Both as a player and as an influencer in our ecosystem, we believe it is our duty to make a positive impact on the environment,” said Nathalie Palladitcheff, President and Chief Executive Officer, Ivanhoé Cambridge. “We view this commitment as a value-creation strategy, and our approach also strengthens the resilience of our assets, because sustainable investments will be more profitable over the long term.” She continued: “Our environmental initiative will make a significant contribution to improving users’ quality of life, in line with Ivanhoé Cambridge’s mission to make a positive impact on the communities where we are present.”

Ivanhoé Cambridge is proactive on two inversely related fronts at its properties: the physical risks caused by climate change, and the risks and opportunities associated with the transition to a low-carbon economy. Accordingly, the Company is committed to achieving a net zero carbon portfolio by 2040.

A first milestone of a 35% reduction in our carbon intensity should be reached in 2025 compared with 2017, the year the trajectory was successfully initiated, with a reduction of almost 20% already achieved in 2020.

In addition, Ivanhoé Cambridge will increase its low-carbon investments by more than $6 billion by 2025 compared with 2020. The company’s low-carbon investments have already grown by nearly 200% since 2017, reaching $14.6 billion as of December 31, 2020. These positive results have already enabled Ivanhoé Cambridge to increase and diversify its green financing, the terms of which are partly tied to the carbon intensity of its assets.

Finally, starting in 2025, the company is committed to making all its development projects net-zero carbon. Over the coming years, its teams will work on taking into account the carbon associated with the construction of buildings, particularly in regards to the materials used.

“Our target is ambitious but realistic, and we aim to ensure that the carbon trajectory of our portfolio is compatible with the Paris Climate Agreement,” said Stéphane Villemain, Vice President, Corporate Social Responsibility. “Our roadmap is a combination of energy-efficiency and renewable-energy strategies, and investment in low-carbon assets. We will act both on improving our existing assets and on our future developments.”

The main levers for achieving this target will be to improve the energy efficiency of our main assets, significantly reduce the use of fossil fuels, and increase the use of renewable energy in our properties. These aspects are particularly promising for the future and open up many investment opportunities, such as the recently announced strategic partnership with Fifth Wall (read the news release).

Climate issues are already systematically integrated into Ivanhoé Cambridge’s investment analyses for all new transactions as well as in asset management, and its properties benefit from a resilience plan tied to climate risks.

Ivanhoé Cambridge has a five-star rating in the GRESB survey, placing the Company in the top 20% of GRESB participants worldwide. With a score of 89 out of 100 for its managed portfolio, Ivanhoé Cambridge ranks first in the GRESB North American Retail (shopping centres) group for the second year in a row. In addition, Ivanhoé Cambridge received the highest score (30 out of 30) in the GRESB assessment of the company’s corporate social responsibility management (leadership, policies and reporting).

In my last comment, I discussed how CDPQ's CEO Charles Emond is urging large investors to follow his organization and invest more in climate action. 

Today, Nathalie Palladitcheff, the CEO of Ivanhoé Cambridge and her team are officially committing to achieving net zero carbon by 2040, laying out a concrete roadmap for achieving this target.

Why are they doing this? Because the real estate and construction sector accounts for nearly 40% of global greenhouse gas emissions and the company is accelerating its decarbonization strategy in light of the urgent need to address climate change.

As you can read from the press release, Ivanhoé Cambridge initiated the road to net zeo carbon back in 2017 under the watch of Daniel Fournier, its former CEO, and Michael Sabia, CDPQ's former CEO who is now advising Chrystia Freeland, the deputy prime minister and minister of finance.

The press release states that a first milestone of a 35% reduction in their carbon intensity should be reached in 2025 and that a 20% reduction was already achieved last year.

Also, the scope of this commitment covers all five continents where Ivanhoé Cambridge owns properties, either wholly or through partnerships, comprising some 800 properties in a variety of asset classes: office and logistics buildings, shopping centres, residential units and hotels.

When you think about the work involved and the scope of the commitment, you cannot help but be amazed and wonder whether they're going to be able to achieve their net zero target by 2040.

But Stéphane Villemain, Vice President, Corporate Social Responsibility remains undeterred:“Our target is ambitious but realistic, and we aim to ensure that the carbon trajectory of our portfolio is compatible with the Paris Climate Agreement. Our roadmap is a combination of energy-efficiency and renewable-energy strategies, and investment in low-carbon assets. We will act both on improving our existing assets and on our future developments.”

The main levers for achieving this target will be to improve the energy efficiency of their main assets, significantly reduce the use of fossil fuels, and increase the use of renewable energy in their properties. 

The press release cites their recently announced strategic partnership with Fifth Wall as an example of moving in the right direction:

Ivanhoé Cambridge is proud to announce a strategic partnership with Fifth Wall, the largest venture capital firm with a focus on real estate technology.  Ivanhoé Cambridge and Fifth Wall share the belief that their partnership will accelerate Ivanhoé Cambridge’s technology adoption and innovation across its portfolio. To date, Ivanhoé Cambridge has also committed US$85 million across four Fifth Wall funds focused on climate technology, retail, real estate technology in North America and Europe, and is the first investor in Fifth Wall’s Climate Technology Fund.

“This strategic partnership is perfectly aligned with our investment vision and will enable us to create value as well as accelerate the deployment of technology-based solutions across our portfolio,” said Sylvain Fortier, Chief Investment and Innovation Officer, Ivanhoé Cambridge. ”It will allow us to have direct access to companies and have insights into emerging trends in proptech.”

With approximately $1.7 billion in commitments and capital under management across multiple strategies, Fifth Wall employs the model of working with strategic limited partners in venture capital, and today, 65 of the largest real estate owners, operators and developers from 15 countries have invested in one or more of Fifth Wall’s funds. Fifth Wall has also identified and invested in many of the most iconic and successful companies in Proptech. Fifth Wall’s investment track record and network will provide unique insights and direct access to technological solutions that will enable Ivanhoé Cambridge to further strengthen and accelerate its technological and service-driven transformation.

“Real estate owners are finding that while investing in technology and innovation is complicated and challenging to do it all in-house, it’s absolutely imperative to the future of their business,” said Brendan Wallace, Co-Founder and Managing Partner, Fifth Wall. “We’re thrilled to be working with Ivanhoé Cambridge and deeply impressed by their holistic view of how large the opportunity is at the collision between real estate and technology, as reflected by their $85 million investment across all of Fifth Wall’s strategies, including climate technology, retail, and real estate technology in North America and Europe. Proptech is no longer niche; it is now one of the largest categories of venture capital and transforming the real estate industry. Ivanhoé Cambridge’s significant commitment to Fifth Wall symbolizes their deep understanding of how important Proptech has become. It is also inspiring to have Ivanhoé Cambridge as the first investor in Fifth Wall’s Climate Technology Fund, and I hope their bold commitment to that fund encourages other real estate owners to begin investing in Climate Tech and to fund the R&D that is required to decarbonize the real estate industry.” 

Indeed, proptech is huge because it allows asset managers to gather all sorts of important data on their properties, adding value to them over the long run. 

For Ivanhoé Cambridge to commit to achieving net zero carbon by 2040, it needs to have the best available data to perform carbon-impact analysis and monitor progress in all its properties all over the world.

Investing in proptech will also allow it to add significant value to all its properties.

Anyway, take the time to read the roadmap to achieving met zero carbon by 2020 here. It's a great presentation full of details. 

Below, I embedded the key slides but read the entire presentation:

As you can see, Ivanhoé Cambridge is committing to achieving net zero carbon by 2040 and since real estate is a big part of of its total assets (roughly 10% as of end of 2020), their success in decarbonizing that portfolio is critical for CDPQ to decarbonize its total portfolio.

Is CDPQ the only large Canadian pension to do this? No, others are doing their part but to my knowledge, Ivanhoé Cambridge is the only real estate subsidiary in Canada to lay out such a detailed action plan of how it is going to achieve net zero carbon by 2040.

In related news, CPP Investments posted on LinkedIn that its Toronto office tower is now LEED Platinum certified:

This is good news and I'm sure its employees are looking forward to getting back to the office one day soon.

In other real estate news, Cohen & Steers — the firm that was arguably responsible for putting real estate investment trusts on the map — is now moving into privately held real estate and building the first investment strategies that can move back and forth between public and private markets.

Lastly, John Kerry said the US is likely to join Europe in mandating climate risk disclosure. 

The world is heading toward carbon neutrality, governments are mandating it but as Charles Emond stated, they can only provide a framework and incentives, it's up to the private sector to do all the heavy lifting.

Below, watch a clip with English subtitles on how Ivanhoé Cambridge plans on achieving net zero carbon by 2040. Bon succès!!

The record breaking rally for US equities last year has helped America’s largest state pension plans to recover from the wounding punch delivered by the coronavirus pandemic which had threatened to damage parts of the US retirement system. 

The aggregate funded ratio for US state pension plans reached 78.6 per cent at the end of December, a jump of 16 percentage points from the 30-year low of 62.6 per cent registered in March 2020, according to estimates by Wilshire Consulting, the investment advice and research provider. 

The funded ratio illustrates the gap between the assets held by a pension plan and its expected liabilities, providing an estimate of the future retirement benefits schemes will have to pay.

Liquidity unleashed by the Federal Reserve in response to the pandemic combined with a series of emergency relief spending programmes helped the S&P 500 to rebound 63 per cent by the end of December from its low point last March. Strong recoveries for US bonds, international equities and alternative investments in the second half of 2020 also boosted the financial position of US state pension plans. 

 “A third consecutive quarterly increase in the value of assets held by state pension plans more than fully reversed the decline in the funding ratio registered in the first quarter of 2020,” said Ned McGuire, a managing director at Wilshire. 

A more detailed picture has emerged of the strains caused by coronavirus on US public pension plans which tend to release their annual financial updates long after their official year end, making any assessment backward looking. State pension plans also have a range of year ends for their annual reports which complicates data aggregation. 

The latest reported data from 134 state pension funds with combined assets of $3.2tn showed that the aggregate funded ratio stood at 70 per cent at the end of June 2020, down from 72.7 per cent in June 2019. 

“The decline ended a streak of three consecutive years of increases in the aggregate funded ratio,” said McGuire. 

Liabilities for the 134 state pension funds have increased by $459bn, or 11 per cent, over the past five years to a record $4.6tn while assets have risen just $178bn, or 5.8 per cent, over the same period to an all-time high of $3.2tn. 

The plans together paid out $252bn in benefits to retirees in the 12 months ending June 30 but only took in just under $162bn in contributions from employers and scheme members. 

More US public pension plans have gone “cash negative” as they pay out more in benefits than they gather in contributions, leaving them more dependent on investment returns to meet pension promises. 

The pandemic appears to have had a bigger impact on pension plans with weaker funding positions which are more likely to already be cash negative. 

A quarter of the 134 public pension plans had sunk into the “distressed” category with a funding ratio of 60 per cent or less at the end of June 2020, up from a fifth over the previous 12 months, according to Wilshire. 

Tyler Bond, research manager at the National Institute on Retirement Security, a Washington-based think-tank, said the decline in the funded position of US public pension plans due to coronavirus was not as dramatic as the deterioration caused by the 2007/08 global financial crisis. 

 “Public pension plans have made design changes over the past decade and adopted more conservative assumptions about future growth that have helped them to become more resilient. The rally in the US stock market means we are likely to see an improvement in the funded status of more public pension plans once data for the current fiscal year ending in June 30 are reported,” said Mr Bond.

Rob Kozlowski of Pensions & Investments also reports state pension plan funding advances in first quarter: 

And remember, when it comes to pension funding, it's the yield on long bonds, more than asset values, that determines the funded status of pension plans.

If I told you last year that the S&P 500 ETF (SPY) would basically double in a year, you'd think I'm nuts.

So what? Pensions are long-term investors, they can ride out any storm, even if stocks and yields plunge again.

Natixis Investment Managers put out a press release highlighting results of a survey showing that ESG investing has reached critical mass but ongoing momentum depends on what's driving the demand:

BOSTON — More financial institutions are deploying a broader range of environmental, social and governance (ESG) strategies¹ to meet rising demand for more sustainable investments, according to survey findings released today by Natixis Investment Managers. Approximately three-quarters of professional investors, including 72% of institutional investors and 77% of the gatekeepers who select funds for their firm’s investment advisory platform, are now implementing ESG strategies, up from 61% and 65%, respectively, in 2018. 

The pace of growth accelerated in 2020, amid record inflows into ESG funds and an unprecedented number of ESG product launches.² This year, 68% of professional fund selectors plan to further expand their firm’s ESG offerings. Their primary reason for doing so is because of investor demand, which fund selectors believe stems from investors’ heightened social awareness (75%) and the fact that ESG investing has now reached critical mass among mainstream investors (50%). Other factors they say are driving demand for ESG include investors’ desire to be part of a greener economy (42%) and concerns about climate change (36%).

“The rapid global adoption of ESG has raised questions about whether the momentum building around ESG will continue or if it’s building toward a bubble,” said Harald Walkate, Head of ESG for Natixis Investment Managers. “The answer lies in greater clarity about what investors ultimately want to achieve, not only to deploy ESG strategies that align with their values but also to set realistic expectations for both financial results and societal impact.”

Natixis analyzed previously unpublished findings from a series of global surveys of institutional investors, professional fund selectors and financial advisors about how they are implementing ESG. When viewed through the lens of Natixis’ most recently published survey of individual investors, key questions emerge about ESG investing and whether professional investors, individual investors and their advisors are on the same page.

Stronger narrative of financial performance

Natixis found that 77% of professional fund selectors and 75% of institutional investors now consider ESG factors an integral part of sound investing. Financial advisors concur. Five years from now, nearly six in 10 (59%) financial advisors expect ESG investing to be standard practice across the industry.

Though a lack of consensus on ESG measurement has been a challenge for investors, 83% of fund selectors and 79% of institutional investors say it’s gotten easier to benchmark performance. As better ESG data has become available and reporting is standardized, Natixis sees a stronger narrative emerging on the financial merits of ESG investing.

• More than half of professional investors surveyed by Natixis, including 53% of institutional investors and 55% of fund selectors, now agree that companies with better ESG track records generate better investment returns.
• Seven in 10 fund selectors and 62% of institutional investors think alpha can be found by incorporating ESG factors into investment analysis. More than six in 10 (63%) advisors also agree that ESG strategies may offer potential to outperform the markets.

When it comes to evaluating a company or industry, nearly half (48%) of professional fund selectors consider nonfinancial ESG factors to be as important as fundamental financial factors. Yet 67% of fund selectors and 74% of institutional investors say it is still hard to know which nonfinancial measures are material to investment analysis.

Multiple paths to ESG: Matching motives with methods

Institutional investors’ top motivation for implementing ESG is to ensure assets better represent organizational values, which has been their top motivation since 2017. Aligning assets and values also is a top motivation for fund selectors, second only to client demand.

Three-quarters of individual investors (77%) previously surveyed by Natixis say it’s important that their investments and values are aligned. Moreover, what investors say they want most out of a relationship with a professional advisor is to have them identify investments that match their personal values. What they mean by that, exactly, is important for financial firms to understand as they expand their ESG offerings and tailor their strategies to best meet clients’ goals – both financial and nonfinancial.

“For advisors, it’s not always clear what clients mean by personal values or whether ESG investors are primarily motivated by a desire to make a better world or better financial returns, or both,” said Dave Goodsell, Executive Director, Natixis Center for Investor Insight. “Ultimately, more concrete evidence of financial and nonfinancial results is needed, but questions and conversations about clients’ motives could go a long way toward helping advisors tailor the best ESG strategies to meet their clients’ objectives.” 

Natixis’s research found no single consensus approach to ESG investing. Rather, firms are employing multiple approaches, with distinct risk-return features, that allow them to tailor strategies and address different financial and nonfinancial objectives.

The survey shows the approaches professional investors are taking include:

• Integration: The most widely used approach, taken by 54% of fund selectors and 48% of institutional investors, is to integrate ESG factor analysis into the overall investment process, accounting for issues that with potential to materially affect company performance.
• Negative screening: Four in 10 fund selectors (42%) and institutional investors (40%) rely on negative screening. The exclusion of companies or industries deemed as unethical or harmful, an approach taken by early adopters of socially responsible investing in the 1970’s, fell out of favor with many investors for lack of compelling evidence that it produced either a financial or societal benefit. The number of fund selectors employing negative screening declined by 15% from 2019 to 2020.
• Active ownership: More than one-third of professional investors, including 35% of fund selectors and 34% of institutional investors, are addressing ESG issues by exercising their ownership rights and voice to effect change, an increase by 45% and 51%, respectively, in 2020 from 2019. Meanwhile, 35% of institutional investors say one of the primary reasons they implement ESG strategies is to influence corporate behavior.
• Impact investing: 42% of fund selectors, but just 34% of institutional investors, are engaged in impact investing, with an intent to generate and measure social and environmental benefits alongside financial returns.
• Thematic investing: 43% of fund selectors and 28% of institutional investors focus on thematic investing, which seeks opportunities in emerging trends such as those driven by demographic shifts, innovation and social or policy priorities.

Methodology

Natixis Investment Managers surveyed 3,600 professional investors globally, including 500 institutional investors, 400 fund selectors and 2,700 financial professionals, about the issues that drive their decisions on ESG investing. Data were gathered in 2020 by the research firm CoreData, with supporting data points from prior-year surveys, including 9,100 individual investors from around the world who were surveyed in 2018 and 2019 about aligning investments with their personal values. 

To view the full report, “ESG Investing: Everyone’s on the bandwagon,” including the methodology related to each survey conducted, a download of the report is available here: www.im.natixis.com/us/research/esg-investing-survey-insights-report.

About the Natixis Investment Institute

The Natixis Investment Institute applies Active Thinking^® to critical issues shaping the investment landscape. A global effort, the Institute combines expertise in the areas of investor sentiment, macroeconomics, and portfolio construction within Natixis Investment Managers, along with the unique perspectives of our affiliated investment managers and experts outside the greater Natixis organization. Our goal is to fuel a more substantive discussion of issues with a 360° view of markets and insightful analysis of investment trends.

About Natixis Investment Managers

Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of more than 20 specialized investment managers globally, we apply Active Thinking^® to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis Investment Managers ranks among the world’s largest asset management firms¹ with nearly $1,389.7 billion assets under management² (€1,135.5 billion).

Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms include AEW; Alliance Entreprendre; AlphaSimplex Group; DNCA Investments;³ Dorval Asset Management; Flexstone Partners; Gateway Investment Advisers; H2O Asset Management; Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Mirova; MV Credit; Naxicap Partners; Ossiam; Ostrum Asset Management; Seeyond; Seventure Partners; Thematics Asset Management; Vauban Infrastructure Partners;Vaughan Nelson Investment Management; Vega Investment Managers;⁴ and WCM Investment Management. Additionally, investment solutions are offered through Natixis Investment Managers Solutions, and Natixis Advisors offers other investment services through its AIA and MPA division. Not all offerings available in all jurisdictions. For additional information, please visit Natixis Investment Managers’ website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers. 

Let me begin by thanking Caryn Brownell of the Hubbell Group for sending me the press release, survey and highlights.

Take the time to view the survey here, it's actually an easy read and very informative.

One of the questions I get a lot is why are investors so focused on ESG? There are a lot of reasons:

The top five are:

1. To align investment strategies with organizational values
2. To influence corporate behavior
3. To minimize headline risk
4. To generate higher risk-adjusted returns over the long-term
5. To make a better world
   

Notice I highlighted number 4, because that is ultimately what pension fund managers and their beneficiaries care about, not that organizational values, corporate engagement, minimizing headline risk and making this a better world aren't important (of course they are).

At the end of the day, implementing ESG -- and implementing it right with a lot of thought -- is about enhancing risk-adjusted returns over the long run.

Earlier this week, I discussed how CDPQ's massive real estate subsidiary, Ivanhoé Cambridge, is committing to achieving net zero carbon by 2040.

Fantastic, the CEO of CDPQ, Charles Emond, is urging large investors to follow his organization and invest more in climate action. 

But behind the hoopla is a lot of work and don't kid yourselves, the ultimate goal here is to enhance risk-adjusted returns.

I remember a conversation I once had with Jim Keohane where we discussed how their new office at 1 York Street is LEED Platimum and he told me: "New buildings are significantly more energy efficient which means HOOPP will collect more rent per square foot and the tenants will benefit from less common costs."

So, yes, apart from feeling good and doing the right thing, it's a matter of dollars and sense.

If your building is environmentally in the lead, you will attract better tenants, they will sign longer leases and you will save significant energy costs. 

As Blake Hutcheson, CEO of OMERS told me on why the organization he leads is targeting a 20% carbon intensity reduction by 2025: "It's a win, win win for all stakeholders and it pays long-term dividends."

Strong results driven by insightful data and actioned by thoughtful people 🌲 #EarthDaypic.twitter.com/1Vd9JXTlvZ

— Oxford Properties Group (@OxfordPropGroup) April 22, 2021

Jo Taylor, CEO of OTPP, is also committed to achieving net zero by 2050 and he has written a comment on the winding road to net-zero, providing a road map and food for thought to all investors (learn more about OTPP's responsible investing approach here).

For his part, Gordon Fyfe, BCI's CEO, is also committed to their climate-related targets for public markets and they are also adopting ESG investing in private markets.

But like his peers, Gordon told me they believe in engagement, not divestment and he added: "Divesting only transfers the carbon to someone else's balance sheet and it's typically investors who are not practicing ESG."

In his letter to Canadians, CPP Investments' CEO, John Graham was unequivocal stating:

[..] climate change is arguably the most pressing factor affecting the investment landscape today. As the global economy moves towards net-zero, our goal is to capture the opportunities and hedge the undue risks that will arrive as society works to reduce and remove greenhouse gases from the real economy. 

He's also on record stating  that divestment is off the table under his watch:

“Simple divestment is essentially a short on human ingenuity,” John Graham told the Financial Post in a recent interview, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.

“We’ve taken the position that we invest in the entire energy ecosystem, and we do not pursue a path of blanket divestment,” he said.

To do this, CPP Investments recently created a new Sustainable Energy Group (SEG) headed by Bruce Hogg, looking at all the risks and opportunities across the energy spectrum.

Ed Cass, their CIO who allocates capital across strategies will play a part in this as will Deborah Orida, senior managing director and head of real assets of CPP Investments, the person Bruce Hogg reports to.

For its part, PSP Investments reiterated its commitment to the Investor Leadership Network (ILN) and the actions it is taking to combat climate change. 

OPTrust has done a lot to bring climate change risk front and center in all its investments. Last year, Alison Loat, managing director for sustainable investing and innovation for OPTrust was quoted stating: 

"COVID has underscored where we all knew we were vulnerable, and we can see some companies doing well," she said. "Social issues have always been one of the top priorities for us, as a labor organization. There have been numerous examples over the past three months of companies not taking it seriously," and engagement with them "I anticipate will accelerate," she said. "Overall, I feel that this might provide an opportunity to accelerate some of the good work that ESG investors are doing." 

I'm a big believer in the "S" in ESG. Climate risk is obviously front and center, but social or what I call "humanity risk" is equally if not more important.

Why? Before we can collectively take care of planet Earth, we must all learn to co-exist in harmony respecting what unites us but also respecting diversity in all its forms.

In particular, I've long been harping on taking care of people with disabilities, offering them the same opportunities that others take for granted.

Importantly, ignoring a problem isn't addressing it, it's actually perpetuating the injustice at your own organization even if that's not your intent. 

That's why I'm tough on leaders when I ask them to reflect carefully on whether their organization is truly taking diversity and inclusion seriously at all all levels and backing it up with publicly available data.

Let me be blunt: it's easy to talk up a storm on diversity and inclusion, much harder to quietly but resolutely take meaningful action, making sure no group is left behind.

Lastly, let me congratulate Alison Schneider, Vice-President, Responsible Investment, Alberta Investment Management Corporation (AIMCo), for being been recognized for a 2021 Clean50 Award in the Financial & Services Organizations category from Delta Management Group - founders of Canada's Clean50 Awards. You can read Alison's profile here (congratulations). 

Mark Wiseman, AIMCo's chair, has explained the organization's next move and why he thinks it can play a critical role in the energy transition to a lower carbon economy. I'm certain Evan Siddall, AIMCo's new CEO, agrees and will take sustainable investing very seriously.

And since it is Earth Day today (it should be every day!), let me end with a couple of interesting things.

First, learn about Denis Hayes, the man who started Earth Day over 50 years ago:

Denis Hayes on why the first #EarthDay went viral, the U.S. solar industry that could have been if Reagan hadn’t stopped it, and what he hopes we learn from the pandemic https://t.co/zAZueXQCAu

— Rolling Stone (@RollingStone) April 22, 2021

And second, keep in mind Mother Nature is always two steps ahead of us and new and dangerous variants of COVID-19 can pop up everywhere, not just Brazil and India:

New Covid variant shows signs of antibody resistance, more severe illness in young people https://t.co/RelgLGLIX8

— Leo Kolivakis (@PensionPulse) April 22, 2021

I tell everyone to continue with all public health protocols even if you have received one or two doses of a vaccine (they're all good but none protect you 100%).

I know, it's tough, everyone is itching to resume their life as if we can magically go back to pre-pandemic times, but that's not realistic, it's shortsighted and not considerate to those waiting for their first jab. 

I leave you with a great clip I found on Earth Day which captures the importance of why we all need to do our part to make this a better world for future generations. Enjoy and Happy Earth Day!

U.S. stocks rebounded on Friday as Wall Street reassessed concerns arising from news that the White House could seek a hike to the capital gains tax.

The Dow Jones Industrial Average gained 227.59 points, or 0.7%, to 34,043.49 amid a jump in Goldman Sachs and JPMorgan shares. The S&P 500 rose 1.1% to 4,180.17 led by financials and materials, while the tech-heavy Nasdaq Composite climbed 1.4% to 14,016.81.

The S&P 500 closed the turbulent week with just a 0.1% loss, while the Dow and the Nasdaq fell 0.5% and 0.3% for the week, respectively.

Wall Street came off a turbulent session for equities after multiple news outlets reported Thursday afternoon that President Joe Biden is slated to propose much higher capital gains taxes for the rich.

Bloomberg News reported that Biden is planning a capital gains tax hike to as high as 43.4% for wealthy Americans.

The proposal would hike the capital gains rate to 39.6% for those earning $1 million or more, up from 20% currently, according to Bloomberg News, citing people familiar with the matter. Reuters and the New York Times later also reported similar stories.

Still, with Democrats’ narrow majority control in Congress, a tax bill like this could face challenges and many on Wall Street believe a less dramatic increase is more likely.

“We expect Congress will pass a scaled back version of this tax increase,” wrote Goldman Sachs economists in a note. “We expect Congress will settle on a more modest increase, potentially around 28%.”

Meanwhile, U.S. taxable domestic investors own only about 25% of the U.S. stock market, according to UBS. The rest of the market is owned in accounts that aren’t subject to capital gains taxes such as retirement accounts, endowments and foreign investors, so the impact on overall stock prices should be limited even with a higher tax rate.

“We would expect opportunistic investors who are unaffected by this proposal to step in and take advantage of lower prices,” UBS strategists said in a note Friday.

Intel shares dropped more than 5% after it issued second-quarter earnings guidance below analysts’ hopes. American Express fell over 4% after the credit card company reported quarterly revenue that was slightly short of forecasts. 

Snap shares, meanwhile, jumped 7.5% after the company said it saw accelerating revenue growth and strong user numbers during the first quarter. Snap broke even on the bottom line while posting revenue of $770 million.

Corporations have for the most part managed to beat Wall Street’s forecasts thus far into earnings season. Still, strong first-quarter results have been met with a more tepid response from investors, who have not, to date, snapped up shares of companies with some of the best results.

Strategists say already-high valuations and near-record-high levels on the S&P 500 and Dow have kept traders’ enthusiasm in check. But indexes are within 1% of their all-time highs.

Shivani Kumaresan, Shreyashi Sanyal and Herbert Lash of Reuters also report Wall Street rallies on strong economic data; tech in focus:

U.S. stocks rallied on Friday, driving the S&P 500  to a near-record closing high, after factory data and new home sales underscored a booming economy while megacap stocks rose in anticipation of strong earnings reports next week.

The bounceback follows a sell-off on Thursday when reports that U.S. President Joe Biden plans to almost double the capital gains tax spooked investors. Analysts dismissed the slide as a knee-jerk reaction and pointed to the strong outlook.

As the three major Wall Street indexes surged, the CBOE market volatility or "fear" index (VIX) plunged almost 10% in a sign of tumbling investor anxiety about the risks ahead.

Companies are providing guidance after staying quiet during the pandemic, while lower bond yields and results that beat estimates are driving the rally, said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.

"There is a lot of anticipation of what's to come," he said. "We've seen actual reports beating these very high expectations. Yields have come back down, which is very positive for tech."

Earnings take center stage next week when 40% of the S&P 500's market cap report on Tuesday through Thursday, including the tech and related heavyweights of Microsoft Corp (MSFT), Google parent Alphabet Inc (GOOGL), Apple Inc (AAPL) and Facebook Inc (FB).

Those names, including Amazon.com Inc (AMZN), supplied the biggest upside to a broad-based rally in which advancing shares easily outpaced decliners.

Expectations for company results have steadily gained in recent weeks as opposed to a typical decline as earnings season approaches. First-quarter earnings are expected to jump 33.9% from a year ago, the highest quarterly rate since the fourth quarter of 2010, according to IBES Refinitiv data.

U.S. factory activity powered ahead in early April. IHS Markit's flash U.S. manufacturing PMI increased to 60.6 in the first half of this month, the highest reading since the series started in May 2007. 

In another sign of strong consumer demand, sales of new U.S. single-family homes rebounded more than expected in March, likely boosted by an acute shortage of previously owned houses on the market. 

All the 11 major S&P 500 sectors were higher, with technology (XLK) and financials (XLF) leading gains.

Ron Temple, head of U.S. equity at Lazard Asset Management, said the U.S. economy is about to post the strongest growth in 50 years, with more than 6% gains both this year and next.

The Federal Reserve will allow the economy to run hotter than in the past, adding to the high-growth outlook.

"Investors are gradually coming around to the sheer magnitude of excess savings, pent-up demand and the implications of such a massive wave of fiscal stimulus," Temple said.

Stocks surged just before the bell, with the benchmark S&P 500 falling a bit to miss setting a record close.

The Dow Jones Industrial Average  rose 0.67% to 34,043.49 and the S&P 500 gained 1.09% at 4,180.17, just below its previous closing high of 4,185.47 on April 16. The Nasdaq Composite added 1.44% at 14,016.81.

For the week, the S&P 500 unofficially fell 0.13%, the Dow about 0.46% and the Nasdaq 0.25%.

Some earnings reports on Friday were lackluster, with American Express Co (AXP) sliding 1.9% after reporting a slump in credit spending and lower quarterly revenue.

Honeywell International (HON) fell 2.1% after missing revenue expectations in aerospace, its biggest business segment.

Naked Brand Group (NAKD) jumped 4.8% after shareholders approved the proposed divestiture of the company's Bendon brick-and-mortar operations.

Image sharing company Pinterest Inc (PINS) gained 4.2% as Credit Suisse raised its price target, saying newer product offerings and expanding footprint in markets abroad will yield higher revenue and user growth.

Advancing issues outnumbered declining ones on the NYSE by a 3.62-to-1 ratio; on Nasdaq, a 2.82-to-1 ratio favored advancers.

The S&P 500 posted 81 new 52-week highs and no new lows; the Nasdaq Composite recorded 111 new highs and 20 new lows.

Alright, it's Friday, another volatile week but we ended on a high note today as stocks rallied sharply.

When you look at the weekly charts of the S&P 500 ETF (SPY), it looks solid led by gains in Tech (QQQ) and Financials (XLF):

When you see stocks breaking out like this, making new record highs, two things are going on:

1. The quant funds/ CTAs are all chasing momentum, buying every dip as long as it's above the 10-week moving average.
2. Global macro funds are shorting this market as valuations are stretched and don't justify such a run-up in stocks.

The regular retail investor will likely stay invested as their financial adviser tells them "there may be a correction but stick with stocks," but as we approach May, I'm reminded of an old saying: "Sell in May and go away."

Still, this market keeps grinding higher as central bank liquidity keeps supporting risk assets.

But don't be fooled, there are signs of excesses and there are plenty of reasons to remain cautious.

The biggest tell-tale sign that we are reaching a top is that margin debt hit another record high in March to top $822 billion, according to FINRA data:

Investors are trading on margin like never before, despite the risks associated with the practice.

According to newly released data from FINRA, margin debt rose 71% year-over-year to hit a record $822 billion in March.

That's a 1.1% increase over February's previous record high of $813 billion.

Margin debt previously spiked to record highs before the dot-com bubble and in 2007 just three months before the 2008 financial crisis.

The chart below from Advisor Perspectives illustrates just how closely margin debt tracks with the S&P 500.

When The Wall Street Journal asked James Angel, a Georgetown University finance professor, about the trend of rising margin debt back in December of 2020 the professor said "the stock market is euphoric right now" and that "a lot of people are extrapolating from the recent past."

"We've seen this play out before, and it doesn't end well," Angel added.

On the other hand, in January, Bank of America told its clients that "investors are not over-levered in terms of margin debt as a percentage of the S&P 500 market cap, with room to run when compared to 2007 through 2018 peak levels."

Since January, margin debt has risen another 3%, but the pace of increase isn't as fast as it was in 2020.

Still, a number of experts have warned about the use of excessive margin debt, including Edward Yardeni, the president of the consulting firm Yardeni Research.

Yardeni told the Wall Street Journal that margin debt "fuels bull markets and it exacerbates bear markets and to a certain extent you put it on the list of irrational exuberance."

"The further that this stock market goes, the higher that margin debt will go, and when something blows up that will be one of the factors for why stocks are going down," Yardeni added.

Michael Burry also warned about record levels of margin debt in the financial system back in February before taking down his Twitter account.

"Speculative stock #bubbles ultimately see the gamblers take on too much debt," the investor tweeted along with a chart showing the S&P 500 and levels of margin debt both soaring in recent months.

We shouldn't be surprised that more investors are trading on margin.

First, more people are opening accounts to trade and most of them are (foolishly) using margin.

But that's the margin we see. What about all the swaps being used by "sophisticated" family offices like Archegos and elite hedge funds?

It's a game of positioning, they keep cranking up the leverage, knowing full well most funds are market weight or underweight, and it all works well until something blows up.

I keep coming back to small caps (IWM) that had a spectacular run over the last year but the rally is stalling here and the risks of a significant correction/ sell-off are high:

Small caps are very sensitive to the economy but elite hedge funds leveraged this trade up to wazoo and now they're priced for perfection and vulnerable as a reversal looks imminent.

I did notice biotechs (XBI) are bouncing here but they're in correction mode:

The same thing with solar (TAN), IPO (IPO) and Chinese internet stocks (KWEB), they bounced this week but are in correction mode:

Of course, this is what you'd expect as the excesses of last year are being wrung out of the market.

As long as Financials and Big Tech are fine, stocks can keep grinding higher but the truth is this market can turn on a dime.

Do you remember Quant Quake 2.0 that hit markets back in September 2019?

I'm worried something similar is going to happen, I just don't know when.

All I know is this isn't a time to play roulette with your retirement.

What else? All the inflationistas are huffing and puffing but PIMCO is right, it's a big head fake:

Over the next several months, we expect to witness a multi-month price level adjustment, which will feel a lot like a shift higher in inflation. However, over the second half of 2021 as the U.S. economy continues to normalize, we believe sequential (quarter-over-quarter) growth in real economic activity and prices will slow, bringing down the y/y rate of inflation. We expect core Consumer Price Index (CPI) inflation will end the year running modestly below 2%, and although core CPI is expected to accelerate to 2.2% in 2022, differences in index construction mean that the Fed’s preferred core personal consumption expenditures (PCE) price measure will lag. This disappointment might be all the markets need to moderate expectations for tighter Fed policy.

You should all read Brian Romanchuk's rant about base effects. 

What about Whirlpool raising prices on some appliances by as much as 12%?

So what? They're taking advantage of pent-up demand for appliances to gouge consumers but they're only shooting themselves in the foot and my prediction is the company will step back from these price increases in a few months, maybe sooner.

There's a lot of nonsense on inflation and even more nonsense on the imminent breakdown of the US dollar:

It's not breaking down, it will come roaring back as the US economy recovers, and when it does, it will mute any transient inflation pressures.

Anyway, read Francois Trahan's latest on whether we are at an inflection point for cyclicals here as he goes into the USD and inflation in more detail. 

Francois states that cyclicals have yet to price in the full lagged effects of the Fed rate cuts last year, I'm not convinced of this as the ferociousness of the rally in cyclicals and other stocks is unlike anything we have ever seen before. 

Also, I can't get Jeffrey Snider's discussion on the eurodollar futures contract leading the Fed off my mind: "This market anticipates what the Fed will do."

Below, MacroVoices Erik Townsend and Patrick Ceresna welcome Jeff Snider back to the show where Jeff makes the case for deflation rather than inflation, against consensus. You can download Jeff's charts here. 

And Marko Kolanovic, J.P. Morgan chief global markets strategist, says the best days of the reopening trade are still ahead. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Karen Finerman and Bonawyn Eison. 

Lastly, David Giroux, portfolio manager of T. Rowe Price’s Capital Appreciation Fund, says they are underweight on equities because they've had trouble finding absolute value. He joins 'Closing Bell' to discuss. I agree with him, take the time to listen to his insights.

Canada’s pension plans enjoy a well-deserved global reputation for strong management and resilient performance, but they are not immune to shocks in the markets in which they operate. The COVID-19 pandemic – a true Black Swan¹ event – has been testing pension plans and their asset managers, prompting significant volatility in financial markets and reshaping the global economy.

This is the backdrop against which we surveyed 50 of Canada’s leading pension plans, seeking insights into how they have coped with the crisis, the challenges and opportunities that now lie ahead, and how they are positioning themselves accordingly. In this report, we present the findings of this research.

The good news is that Canada’s pension plans are well-governed, maintaining diversified portfolios that deliver returns closely aligned to their long-term liabilities. This far-sighted approach has provided some protection from the disruption caused by COVID-19; most plans have the time and the space they need to work through the immediate impacts of the pandemic on short-term returns.

In this difficult environment, pension plan leaders are now thinking hard about what is needed to maintain confidence in their ability to meet their long-term obligations – above all, to fund pension payments to their members. Some repositioning will be required.

In the first chapter of our report, we present our findings with respect to how pension funds are adapting their investment strategies. Over the months ahead, we will invite you to join us as we explore other dimensions of Canada’s innovative pension and investment landscape.

In the second chapter, we present insights, opportunities and challenges with which Canadian pension funds are grappling as they seek to position their organizations for the future. In particular, we explore how Canadian pension plans are significantly advancing their in-house teams and capabilities with respect to investment and technology operations, even as they look to strategically outsource key functions to achieve scale and capture opportunity.

CIBC Mellon put out a press release to go over the findings:

Canada's sophisticated pension funds are at the forefront of a trend to shift asset management functions in-house – along with associated requirements for investment operations and systems. Even amid rising focus on in-house management, plan sponsors are also becoming increasingly strategic about selection of, allocations to and oversight on external managers, according to a new survey of 50 leading Canadian pension funds entitled, "In Search of New Value: How Canadian Pension Funds are Preparing for a Post-COVID-19 Environment," published today by CIBC Mellon.

The first instalment of the research, "Investment Strategy: What will life look like after COVID-19?" highlights how Canadian pension funds are preparing increase the portion of assets and investment activities managed in-house to 28% from 22%.  In particular, real estate (58%) and equities (48%) are the asset classes where the largest portion of pension funds are planning to increase in-house management over the next 12 to 24 months. That said, the survey also confirms that Canadian pension funds continue to see significant value in leveraging external managers to deliver returns across key asset classes.

"Many Canadian pension funds take a nuanced approach to asset management. Where appropriate, they operate with in-house teams and this appears to be increasing," said Alistair Almeida, Segment Lead Asset Owners, CIBC Mellon. "Elsewhere, they are pursuing partnerships and collaborations, as well as full-scale outsourcing arrangements. There is no one-size-fits-all arrangement."

"As the Canadian investment industry works through the market turbulence, early indications are that investors may see this as an inflection point to secure increased transparency," said Ash Tahbazian, Chief Client Officer, CIBC Mellon. "From gathering information to assist in various risk and performance scenarios, to launching separately-managed accounts with trusted asset managers, initial feedback is that investors are keen to further the gains they have made in enhancing control in recent years."

Download the Chapter 1 of the study at www.cibcmellon.com/insearchofnewvalue  clients can also contact their CIBC Mellon relationship manager to learn more or arrange a detailed discussion of the findings.  

Additional findings include:

• Pension funds have significant plans to alter the mix of their portfolio. Notably, 86% of funds expect to reduce their exposure to infrastructure over the next 12 to 24 months.
• The asset class most likely to see a rise in allocations is private equity, where 90% of respondents say they intend to increase allocations over the next year. Almost half of funds (42%) expect to raise their exposures to real estate.
• Almost nine in 10 pension funds (86%) expect to invest more in fixed-income assets in the short term. However, not all funds are taking a defensive stance: 36% plan to increase their allocations to equities, almost twice as many as plan to trim allocations, while 20% anticipate a reduction in the size of their cash holdings. 

Methodology

The survey of 50 leading Canadian pension managers was completed in 2020.  Half of respondents had between C$600m and $1.2B under management, and half had more than $1.2B under management.

About CIBC Mellon
CIBC Mellon is a Canadian company exclusively focused on the investment servicing needs of Canadian institutional investors and international institutional investors into Canada. Founded in 1996, CIBC Mellon is 50-50 jointly owned by The Bank of New York Mellon (BNY Mellon) and Canadian Imperial Bank of Commerce (CIBC). CIBC Mellon's investment servicing solutions for institutions and corporations are provided in close collaboration with our parent companies, and include custody, multicurrency accounting, fund administration, recordkeeping, pension services, exchange-traded fund services, securities lending services, foreign exchange processing and settlement, and treasury services. As at December 31, 2020, CIBC Mellon had more than C$2.1 trillion of assets under administration on behalf of banks, pension funds, investment funds, corporations, governments, insurance companies, foreign insurance trusts, foundations and global financial institutions whose clients invest in Canada. CIBC Mellon is part of the BNY Mellon network, which as at December 31, 2020 had US$41.1 trillion in assets under custody and / or administration. CIBC Mellon is a licensed user of the CIBC trade-mark and certain BNY Mellon trade-marks, is the corporate brand of CIBC Mellon Global Securities Services Company and CIBC Mellon Trust Company, and may be used as a generic term to refer to either or both companies.

For more information, including CIBC Mellon's latest knowledge leadership on issues relevant to institutional investors active in Canada, visit www.cibcmellon.com.

You can download chapter 1 of this report here and chapter 2 here.

Now, this survey covers many of the smaller plans I do not cover in my comments, along with the bigger ones which I do cover.

The large, sophisticated Canadians pensions already manage most of their assets in-house across public and private markets.

They have developed a strong fund investment/ co-investment model to reduce fee drag in private equity and go direct in real estate and infrastructure.

In my opinion, the biggest risks the pandemic exposed at Canada's large plans is diversification risk of certain asset classes.

In particular, large Canadian pensions which were more diversified by sector and geography in real estate and infrastructure fared better than those that weren't.

Today, I listened to a fascinating discussion on asset allocation featuring IMCO's Patrick De Roy, Senior Managing Director, Total Portfolio & Capital Markets.

He took part in a ACPM panel discussion featuring Eric Menzer, Global Head of OCIO and Fiduciary Solutions, Manulife Investment Management and Sadiq Adatia, Chief Investment Officer, Sun Life Global Investments. It was moderated by Zaheed Jiwani, CFA, Principal, Eckler.

All the panelists offered great insights but my attention was honed in on what Patrick was saying.

He explained why bonds are still important for diversification and liquidity and why LDI isn't dead at pensions managing assets and liabilities. 

He also went into credit and infrastructure stating some infrastructure deals now offer a yield lower than you can get in credit deals, which highlights why valuations are extended and explains why most Canadian pensions are reducing their exposure to infrastructure over the next 12 to 24 months.

On real estate, he confirmed what I've been saying, namely, there might be a paradigm shift going on so the winners can remain winners and losers will remain losers if indeed there is a structural shift going on.

The most important point he conveyed, however, is how important it is to remain highly diversified in the post-COVID environment.

Consensus right now is once vaccinations are completed, we are going back to pre-pandemic life.

In my opinion, this is a very optimistic and unrealistic scenario. There will be serious dislocations in all markets in a post-COVID world and a lot of uncertainty.

The only way to deal with such uncertainty is to maintain a very well diversified portfolio.

Anyway, please take the time to watch this panel discussion below, it's excellent.

Like his bosses, Bert Clark and Jean Michel who I spoke with a couple of weeks ago when I covered IMCO's 2020 results, Patrick De Roy also discussed the importance of rebalancing in a diversified portfolio and like them he also touched about the risks of this "ALL IN" approach central banks have engaged in.

When everyone is "ALL IN", you need to pay attention to the risks out there. This is especially true for US state pensions that saw some improvement in their funded status but are at risk if yields and assets drop when the next deflationary crisis hits.

I also embedded clips featuring a discussion on CIBC Mellon's findings. Take the time to view them.

In its most recent Stewardship Investing Report released on April 21, 2020, CDPQ provides an overview of the latest developments in its strategy to fight against climate change, as well as on matters related to equity, diversity, inclusion and governance. Charles Emond, President and Chief Executive Officer, and Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing, take stock of 2020 and provide some important observations on the organization’s ambition to achieve a green, equitable and inclusive economic recovery.

In 2020, the COVID-19 pandemic and ensuing crisis had unprecedented impacts on communities, exacerbating already existing inequalities. Women, young people and members of ethnocultural minority groups around the globe were particularly hard hit.

This year also saw citizens around the world stand up in support of social justice. The echo of their voices is a strong signal that encourages us to continue and expand our efforts to promote equity, diversity and inclusion.

While the crisis has severely affected economies, the recovery is an opportunity for us all to rebuild better and be more ambitious in our fight against climate change and meet rising needs. By directing capital to a greener, more equitable transition, we can generate growth while contributing to a more sustainable world.

As a global investment group that takes a long-term approach, we have an opportunity to invest and develop assets that foster stronger communities and healthier living environments. Guided by this ambition, we can carry out our mission while safeguarding the trust of millions of Quebecers for whom we are working, as well as the communities that are home to our portfolio companies.

Each day, we assess the quality of our investments in light of targeted returns as well as rigorous sustainability criteria. Our teams also rely on expertise and close collaboration with our partners to promote ideas that are important to us, such as fighting climate change, promoting diversity and inclusion and sound governance within our portfolio companies.

Enhancing our climate ambitions

We work to fight against climate change each and every day. Given that we have exceeded our targets set in 2017, this first phase of our commitment has been successfully completed this year.

In the coming months, we will be resetting our low-carbon investment targets to focus more on assets that support the transition.

Moreover, adjusting our carbon intensity reduction target will allow us to enhance our efforts across our entire portfolio. We will pay very close attention to the decarbonization of the real economy by strengthening our commitment to our portfolio companies as the transition unfolds. Our target is still tied to our goal of achieving a carbon neutral portfolio by 2050 and we are continuing our efforts in this area, particularly with our partners.

In line with this vision, we have also confirmed that we wish to eliminate our coal exposure and that we have significantly reduced our exposure to oil production since 2017, in keeping with our goal to ultimately eliminate the most polluting forms of fossil fuel from our portfolios.

Promoting equity, diversity and inclusion

This past year has solidified our conviction that championing equity, diversity and inclusion is now more important than ever.

We have clarified our expectations of portfolio companies in our improved Policy on the Principles Governing the Exercise of Voting Rights of Public Companies. This governance tool provides guidance for our voting positions with regard to our stewardship investing priorities, allowing us to signal that our portfolio companies must implement this change more quickly.

Because we firmly believe that a corporate culture based on equity, diversity and inclusion is synonymous with success, we also provide an inclusive work environment for the development of all our talent. 

In addition, we continue to work with our international partners to advance these issues in our industry, both locally and around the world. 

Leading by example on best governance practices

The impacts of the pandemic have shined a light on how important strong governance is.

Transparency and resilience are fundamental in the companies we invest in.

We develop our companies’ expertise in areas such as environmental, social and governance (ESG) factors, cybersecurity and abusive tax planning through discussions with our experts.

The progress made and results achieved in recent months illustrate the important work our teams do, our efforts to address these major societal issues and our commitment to meet our depositors’ needs.

For the coming year we will continue down this path of investing constructive capital.

You can download CDPQ's 2020 Stewardship Investing Report here.

I strongly recommend you take the time to read this report, it's very well written and packed with great insights.

The first figure in the report shows you how CDPQ's geographic exposure has changed over the last 10 years:

Not surprisingly, Canadian investments have been reduced and are being reduced to invest more in the US, Europe and rest of the world, especially Asia and Latin America.

The second figure shows you the levers of influence in their stewardship investing:

The report goes into details on the four pillars of their investment strategy on stewardship investing:

Importantly, each pillar is backed up by actionable processes which include developing specialized tools to factor climate risk into their investment process, carbon budgeting, investing in innovation and variable compensation tied to achieving climate targets.

In other words, every pillar is thought out and there are concrete steps and ways to measure if targets are being achieved.

In terms of supporting international initiatives:

• CDPQ cofounded the Investor Leadership Network against the backdrop of Canada’s presidency of the G7 in 2018. The ILN currently brings together 14 global institutional investors.
• CDPQ is one of the founding members of the UN-convened Net-Zero Asset Owner Alliance, a UN initiative that currently brings together 35 large global investors with a shared objective of achieving carbon-neutral portfolios by 2050 while focusing on the impact on the real economy.

In terms of promoting diversity and inclusion I note these three pillars:

Again, these pillars are backed by actionable steps and performance targets. For example:

This is great but I do have one remark: why did CDPQ leave out people of disabilities? It needs to start taking some initiative there, working with non-profit groups like AIM CROIT to hire and develop more talent from disadvantaged and marginalized groups.

I keep harping on this and then I get people telling me: "Well Leo, people with disabilities can't work at CDPQ or CPPIB, it's too stressful and hard."

I say "absolute rubbish!!", if you focus on negatives and their disabilities, not their abilities, then don't bother hiring them because you'll make their life miserable.

Anyway, the report ends with three pillars of supporting responsible governance:

Again, I encourage you to take the time to read the details in the report as it covers all these pillars in-depth.

I was also happy to note that CDPQ continues its support of communities and stepped up its efforts during this crisis. 

In fact the report begins by noting the pandemic has exacerbated inequality, hitting women, young people and ethnocultural minority groups particularly hard.

We talk a lot about doctors, nurses, teachers, police officers and other front line workers but what about the working poor, typically immigrants, working at some plant, not being able to take any paid sick leave? (don't get me started on Doug Ford and paid sick leave, they really dropped the ball!)

All this to say we take a lot of things for granted (and that includes me who has the luxury of typing this blog at a leisurely pace every afternoon from the comforts of my home), but we all need to step back and remember there are people out there who are really suffering and need help.

Just today, I drove downtown and was struck by how many beggars were coming up to my car every other block. I was thinking how Montreal is struggling but then I remembered, it's not just Montreal, these are social problems you see in every major city right now. 

I'm not going to lie, it was depressing driving downtown, it looks and feels pathetic, not to mention there's still endless construction all over St-Catherine street (what the hell are they doing?!?).

I'm looking forward to the day where downtown Montreal is bustling again, with cafés open, people sitting outside, enjoying the beautiful summer days. 

It's going to come, we need to be patient and wait a couple of more months so more people get at least their first jab and hopefully their second.

Alright, let me wrap it up there. Take the time to read CDPQ's 2020 Stewardship Investing Report here.

I commend Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing, and her team for putting together this excellent report. Very well done.

Also, read my previous comment where CDPQ's CEO Charles Emond discusses investing in climate action.  

One thing is for sure, Charles is following in his predecessor's footsteps taking ESG very seriously and shaping it in his own vision. These aren't just empty words, they're backed by a strategy, concrete actions and measurable processes and targets.

Lastly, take the time to read CDPQ's 2020 Annual Report (in English), Constructive Capital, here. 

Below, watch this exchange which took place earlier today between Conservative MP Pierre Poilievre and the Governor of the Bank of Canada, Tiff Macklem, who was also part of the Expert Panel on Sustainable Finance with Kim Thomassin, Barbara Zvan and Andy Chisholm.

What Pierre Poilievre doesn't realize is in order for the Bank of Canada to continue its asset purchases, it needs the federal government to emit billions in debt which the Bank then monetizes. The exact same thing is going on in the US where Fed Chair Jay Powell said they're staying put, not raising rates.

But Poilievre is right about one thing, central banks can only create housing and asset inflation, not sustained inflation which comes from wages gains, and this only exacerbates inequality. 

To be honest, my biggest fear is central banks are cornered, sowing the seeds of the next deflationary crisis and it won't end well. 

Lastly, last November, Governor Tiff Macklem and Barbara Zvan, President of University Pension Plan Ontario, discussed the Bank of Canada’s role in advancing sustainable finance in Canada and other recommendations of the Expert Panel on Sustainable Finance. Watch it below, excellent discussion.

Bert was kind enough to forward me a paper on investing in challenging times which formed the basis for his fireside chat earlier today:

Investing isn’t easy. There are no immutable laws of investing. There are no hard and fast rules, only probabilities, and much of that is beyond an investor’s control.

The big unknowns of any era are ultimately resolved and in retrospect they look logical and even predictable. As a result, every investor probably thinks they are living in challenging times.

Like previous environments, today’s investment landscape is characterized by many unknowns that make investing challenging. While there are no silver bullet techniques for navigating market challenges, there are well-known and straightforward strategies that have generated better returns over the long term. These include: Diversification, liquidity management, targeted pursuit of net value add, cost control, sound risk management and navigation of big trends.

At IMCO, these are the strategies we follow.

THE CHALLENGE OF INVESTING TODAY

To put things into context, here are the things that make investing challenging today.

First, markets are being driven by central bank activity. Twenty years ago, central banks influenced short-term interest rates, had very small balance sheets and made intentionally vague public statements about the future path of short-term interest rates. They also had narrow mandates generally, focusing primarily on stable inflation (and for some, a dual mandate that also included full employment).

Today, the U.S. Federal Reserve balance sheet is bigger than many of the largest asset managers in the world and it directly influences the market on bond pricing across the entire interest curve. The Fed is not alone. For over a decade, the European Central Bank, the Bank of Japan and the Bank of Canada have consistently affected capital markets in what were referred to as “unorthodox” ways.

Today, central banks are also being relied on to pursue a broader implicit mandate: Ensuring the smooth operation of capital markets (especially in times of crisis), keeping market volatility in check, and preventing major market corrections. There is also talk of expanding their formal mandate to include public policy considerations, such as climate change.

While central banks are powerful, they are not all-seeing and all-powerful. It worries me when they pursue multiple goals and when they are deeply engaged in the capital markets because investors are then dependent on central bankers getting many things right.

Ultimately, central banks will need to anticipate the second order impacts of their intervention: What happens if extended intervention in the capital markets makes all asset classes expensive? How do they withdraw massive monetary stimulus without deflating the value of all assets? What if monetary policy exacerbates inequality? What if it leads to poor allocation of capital? What happens if it encourages spendthrift fiscal policy?

Central banks will need to reconcile many public policy objectives, second order effects and externalities in one mechanism – interest rates. That is not going to be easy.

The second challenge is that we are at the intersection of two powerful trends: A lower-for-longer interest rate and growth environment and above average short-term inflation and growth.

Coming into the COVID-19 Pandemic we appeared to be stuck in a lower-for-longer environment. Debt, demographics, inequality, and technology all seemed to be weighing on interest rates and growth in the largest economies. These are powerful forces, which aren’t easy to overcome, as central banks had been priming the pump to an extraordinary extent for a decade. COVID has done nothing to reverse these phenomena, in fact, it has probably reinforced them. Society is now more unequal, older, and more in debt, while the technology sector got a big boost from consumer and business behaviours adopted during the pandemic.

However, the combination of extraordinarily large government spending, coupled with a global wave of central bank stimulus measures, along with a bounce back from the steep contraction in employment, growth, and inflation last year, is giving rise to higher growth and inflation (at least, in the U.S. and China).

If you consider these two divergent trends, it’s not obvious which one will dominate. Therefore, we are starting to see a debate around the benefits and risks of continued fiscal and monetary stimulus. Are we coming out of a recession and bouncing back to a lower-for-longer return environment? Or, is rising inflation the start of a coming period of sustained growth and monetary and fiscal policy risks overheating the economy?

A third challenge for investors today is that years of unorthodox monetary policy may not have managed to stoke inflation, but it did manage to drive down the risk premiums for almost all classes. So, today almost all asset classes are expensive by historical standards. All other things being equal, higher starting valuations lead to lower returns and investors therefore need to be concerned about returns over the coming decade.

The compression of risk premiums complicates things for investors in one other important way. It has pushed investors into riskier asset mixes, by making it more expensive to own government bonds. The combination of less government bonds and lower risk premiums across all asset classes means that the typical investor’s portfolio is more susceptible to inflation (government bonds are already starting at negative real yields) and deflation (larger allocations by most investors to riskier assets provides them with less protection from deflation). In other words, most investor portfolios will perform well in a narrower range of circumstances than in the past.

No doubt, investors also face other challenges: The impact of technology, the path of globalization, the continuing rise of China and its relationship with the U.S., the ongoing impact of the COV ID-19 Pandemic, and inequality. But, in my view, the distortion of asset prices by central banks, the intersection of longer-term deflationary trends and short-term inflationary trends, coupled with the high price of all asset classes are the most critical.

KEY INVESTMENT STRATEGIES

It is not possible to completely outsmart or outrun the challenges of any era. But I believe there are straightforward investment strategies that improve risk-adjusted returns over the long term, through a range of investment environments.

ASSET CLASS DIVERSIFICATION

I believe that the most important investment strategy is diversification.

In an ideal world, diversification would mean building a portfolio that could perform equally well in all macro-economic environments.

But most investors can’t afford to have significant portions of their portfolios invested in nominal and inflation-linked government bonds, especially today. The expected return of the portfolio would be too low. To meet their long-term investment objectives,most investors have portfolios that are dominated by allocations to assets that are riskier than government bonds (e.g., public and private equity, credit, infrastructure, and real estate). This kind of portfolio should generate higher returns over the long term than a perfectly diversified portfolio with a larger allocation to government bonds (at least it has in most, but not all decades). But it will not perform well in all macro-economic environments. It will tend to perform best in periods of growth and stable inflation, and it will not perform as well in periods of deflation or stagflation.

As a result, for most investors, diversification means accepting they have a portfolio that is heavily titled to riskier assets but still working hard to avoid significant concentrations in any one riskier asset class, or any one country; and not overdoing any of the common return enhancing strategies (such as investing in private assets or using leverage).

ENSURING ADEQUATE LIQUIDITY

You can’t be a long-term investor if you are forced to sell riskier assets in times of market strain.

Many investors have portfolios that are dominated by riskier assets to enhance their potential returns. Riskier assets are priced to generate higher returns over the long term, in comparison to investments like government bonds, to compensate for their near-term price volatility. But this means you need to be able to hold on to those riskier assets through periods of volatility. Proper liquidity management ensures you can do this.Proper liquidity management also allows you to rebalance in times of market stress, which can be one of the simplest and most powerful ways to profit from the volatility of riskier assets.

TARGETED PURSUIT OF NET VALUE ADD

Net value add means outperforming market indexes. Numerous studies have confirmed just how rare this is in the asset management industry.

Despite the preoccupation of the asset management industry with net value add, often there are more straightforward ways to increase returns, than trying to accurately predict winners within each asset class. Sometimes, an investor would be better off, on a risk-adjusted basis, simply altering their asset mix to include more risky assets (if they are diversifying) or adding a small amount of leverage, if they are interested in increasing returns and are comfortable adding risk.

However, if an asset manager does want to generate outperformance within asset classes (this is an entirely legitimate objective, especially where you have some advantage) and they believe they are able to do this in a way that is more efficient from a risk-adjusted basis than simply adding risk assets to their asset mix or a small amount of leverage, then success requires focus.

Focus means investing such that outperformance or underperformance will matter. That takes courage. It means not spreading your bets at the asset class level too thin. It means having conviction around each of your investments because if you place bets that are too small within an asset class, you will end up with what famed investor and philanthropist, Peter Lynch called“diversification”: A multiplicity of investments that when taken together looks a lot like the index and generates average results.

Focus also means pursuing outperformance where you have an actual competitive advantage. This could be a longer investment time horizon, a tolerance for complexity, an ability to serve as a capital partner and work with companies in which you invest, or the ability to hire best-in-class specialist investors on cost-efficient terms.

CONTROLLING COSTS

Costs are one of the few things you can control as an investor; and costs matter even more when you are operating in an environment of potentially lower returns.

Today the so-called “2 and 20” fee structure that is common for private assets and hedge funds results in fees that are very large in relation to expected returns for most asset classes. This common cost structure was developed in an investment environment where returns were much higher than they are expected to be going forward. But the fee structure has not evolved and paying these kinds of fees makes it very hard to achieve satisfactory net returns.

When possible, investors should avoid fund of funds structures. They should use their scale to negotiate preferable fee arrangements. They should co-invest alongside their private asset managers. They should also selectively internalize activities (where they can achieve the same investment results at less cost).

MAINTAINING SOUND RISK MANAGEMENT

At IMCO, our approach to risk management has three elements.

First, we only invest in things we can understand, measure and monitor.

Second, we are investors not speculators, as there is an important distinction between these two things. Investors allocate capital to productive initiatives that are designed to generate returns through ingenuity and hard work. While investors hope to buy at a good price, their investment thesis is not primarily dependent on short-term market movements. On the other hand, speculators look to earn returns exclusively by correctly anticipating near-term changes in the market. This is very hard to do and it’s something we generally avoid.

Third, we follow best practices when it comes to risk management. In many cases, this means looking to other segments of the financial services sector for ideas, such as banking and insurance.

NAVIGATING BIG TRENDS

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

The challenge for large institutional investors is having the discipline to evolve to reflect a changing world. Leading asset managers are no different than the best companies in other sectors. The best run companies aren’t necessarily the ones with unique insights who are way ahead of the pack. They are the ones that leverage their natural advantages and have the discipline to adapt their large and diverse operations and investments to reflect big powerful and well-known trends. In other words, it is just as much about hard work and discipline, as it is about unique insights.

For example, the most successful car companies will be those than make the transition to electric vehicles. The most successful technology companies will be those that adapt to the cloud and other technology trends, like blockchain. The challenge is not identifying the phenomenon of electrification, or the cloud or blockchain, but rather of adapting to them.

At IMCO, we are spending lots of time thinking about the ways we need to adapt our clients’ portfolios to powerful and well-recognized trends.

For example, we are adapting our organization to respond to the set of powerful changes across the investing and policy spectrum often referred to as Environmental, Social and Governance (ESG).

We believe that better governed, more inclusive, and diverse organizations, with a plan around a less carbon-intensive future, will perform better and represent better investment opportunities for us. But making sure our clients’ portfolios reflect these beliefs requires a considerable amount of work.

ESG beliefs need to be embedded in all investment activities: How you choose managers, make individual investments, benchmark performance, invest passively, vote proxies, report, and set goals around sustainable investments. Right now, we are in the midst of making sure all our investment activities reflect our beliefs around ESG.

CONCLUSION

While investing isn’t easy, it doesn’t need to be made more complicated.

It becomes less complicated if you accept that most eras are dominated by one or more big unknowns and there are no sufficiently reliable ways to predict how those unknowns will play out. Ideally, you should be comfortable with those unknowns playing out in a range of ways.

Today, the three most important unknowns are the impact of ongoing central bank involvement in the markets, the intersection of powerful deflationary and inflationary trends and the high price of most asset classes, especially bonds.

The best overall strategy is to make sure you can live with these unknowns and stick to the straightforward strategies, which have been shown to generate better performance, including diversification, liquidity management, very targeted investment strategies, cost efficiency, sound risk management and navigating big trends through a range of environments.

These strategies are known to most, but the challenge is to have the discipline, and to do the hard work required to consistently follow these strategies. It is simple, but not easy.

What a fantastic comment from Bert Clark, I read it twice to absorb all the great insights he provides here and I thank him for sharing this with me.

I used to allocate to the top hedge fund managers all over the wold and I have never read a paper like this. It's beyond thought-provoking, he explains the major structural and cyclical forces that make it very challenging for IMCO and all asset managers to invest in this environment.

I share Bert's concerns on expanded central bank intervention in financial markets and we touched upon it when I went over IMCO's 2020 results with him and Jean Michel, IMCO's CIO.

In short, central banks have adopted what Patrick De Roy, IMCO's Senior Managing Director, Total Portfolio & Capital Markets, calls an "ALL IN" approach. 

Central banks all over the world are still fighting the deflation demon. Why? Because nothing scares Wall Street and elite hedge funds and private equity funds more than deflation. Once you're stuck in a protracted debt deflationary trap, it's almost impossible to get out of it.

This is why central banks keep talking down cyclical inflation ("it's transitory") and want to keep the pedal to the metal on asset purchases and keep rates lower for a lot longer.

But as I keep warning my readers, central banks can only create asset and housing inflation, not sustained inflation which comes from sustained wage gains. 

Ironically, central banks' policies are exacerbating inequality, which is deflationary over the long run.

For example, the Fed is backstopping investment grade and high yield bond markets as part of its response to the pandemic. Large corporations emit billions in corporate debt, investors snap it up knowing the Fed is backstopping this market, and companies use that money to buy back shares to raise their earnings per share and reward their executives lavish executive compensation.

This is capitalism? This isn't capitalism, it's corporate welfarism/ cronyism at its worst. 

Meanwhile, you have restaurants and many other small businesses shuttering, unable to make ends meet to make their rent and payroll and central banks aren't bailing them out (maybe indirectly and they do get some fiscal relief measures which only buys them some time).

Where am I going with this? Massive central bank intervention is distorting markets and it's exacerbating inequality.

Maybe this is the goal of these policies, namely, to concentrate wealth and power in the hands of fewer and fewer companies and tech and corporate moguls, but it has its limits and as Ray Dalio has warned, it will cause major social unrest.

Worse still, I am afraid that central banks are sowing the seeds of the next major deflationary crisis as asset values and housing prices go parabolic.

There's so much leverage in the system and I am not just talking about margin debt, I'm talking about total return swaps prime brokers extend to the Archegos of this world so they can quietly leverage up their equity positions (of course, Archegos is only the tip of the iceberg, many funds are doing the exact same thing to a lesser or equal extent).

What all this liquidity and leverage has done is send asset prices higher and higher and increased the risks for pensions and other asset managers. 

In the background, you still have the inflation/ deflation debate I keep harping on. 

In a recent comment on the marked improvement of US state pension plan funding, I didn't mince my words: “the risk of global deflation, not inflation, has never been higher than at any time over the last 10 or 20 years.”

"Come on Leo, everyone and their mother is warning of inflation!"

And, so what? I don't get excited by news headlines, I'm a thinker, I'm paid to think and think long and hard of the risks out there, and there are plenty.

Sure, the US economy will post great annualized GDP figures, inflation pressures are high, but what you really need to ask yourself is how sustainable is this?

The way I see it, the end will come in one of two scenarios:

1. Either we get runaway inflation and high or low growth (stagflation) pushing rates up to levels that the economy and markets cannot support, forcing more central bank intervention.
2. Or, we will see a deflationary crisis which will start in financial markets and spread to the real economy, bringing about massive unemployment. This too will force a lot more central bank intervention but the effects of additional monetary stimulus will be a lot more muted.

Of course, I'm reminded of what Ray Dalio told me back in 2005 when I was adamant that deleveraging/ deflation lies ahead: "What's your track record?"

Ray was forcing me to stop being a stubborn Greek and embrace the fact that nobody knows the future, so it's best to diversify all your risks.

This is what Bert Clark is also saying but he includes other things apart from diversification, like liquidity management, very targeted investment strategies, cost efficiency, sound risk management and navigating big trends through a range of environments.

By the way, one important way IMCO manages its liquidity is through bonds.

You want to increase your allocation to bonds when asset values are very frothy to prepare for the eventual sell-off to buy back assets when they are cheaper.

Earlier this week, I read a Bloomberg article on how bonds beat stocks at pension funds, turning 60/40 inside out:

The debate over the traditional 60/40 portfolio seems endless, but for pensions at least, it’s over -- and bonds won.

The retirement funds of the top 100 U.S. public companies, with combined assets of about $1.8 trillion, have ratcheted up their fixed-income allocations to a record level. At the end of their last fiscal year, they held 50.2% of assets in debt, while slashing money parked in equities to an all-time low of 31.9%, according to a recent report from pension advisory firm Milliman Inc.

The shift, part of a longer-term transition spurred by federal legislation that made fixed-income more appealing, is gaining momentum even though asset class returns have gone in opposite directions with stocks surging to record highs while a four-decade rally in U.S. bonds is in jeopardy. Analysts see the emphasis on debt by the funds accelerating, and maybe most significant, potentially helping to blunt any move higher in yields.

“The big improvement in funding ratios implies a high incentive” for “U.S. private defined benefit pension plans to lock in the recent gains in their funding position by accelerating their de-risking going forward,” a team of JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou wrote in a recent note. That means “accelerating their buying of long-dated bonds and selling of equities.”

Pension funds tend to follow a strategy of matching liabilities -- which are usually long term -- with similar maturity assets, usually debt. Even though rising yields can hurt returns in the short-run, they’re a plus since they can help reduce the present value costs of obligations.

Paltry yields that seemingly have nowhere to go but up have been an almost universal worry that has prompted investors to question the wisdom of sticking with the long-favored portfolio diversification recommendation of 60% stocks and 40% bonds.

Ten-year Treasury yields have risen over a percentage point since August, nearly reaching 1.8%, as an improved vaccine rollout sparks business reopenings amid trillions in fiscal stimulus. The jump in yields resulted in the worst quarter for Treasuries since 1980, and has prompted Wall Street to predict even higher yields before year-end. Meanwhile, the S&P 500 index climbed 5.8% in the three months ended in March, the fourth consecutive quarterly increase.

Until last quarter, it’s mostly been the best of both worlds for pension funds, with equities outperforming long-duration debt even as yields plunged over the past few years. That generated gains that exceeded increases in pension liabilities.

The funding status -- a measure of the degree to which pensions have enough assets to meet liabilities -- of the 100 companies tracked by Milliman was 88.4%. Since 2005, the funds have also increased their allocations to “other” investments including private equity, real estate, hedge funds and money market securities to 17.9% from 9.5%. The majority of the companies have a fiscal year end that coincides with the calendar year end.

“The main reason for the overall shift from equities into fixed income has had to do with the change in pension regulations,” said Zorast Wadia, a principal at Milliman. “And as these pensions’ funding status have improved they have continued to shed equity risk -- getting more and more into fixed income.”

Under the federal Pension Protection Act passed in 2006 companies had a set time to fully fund retirement plans and were required to use a specified market-based rate of return -- tied to corporate bond yields -- to compute liabilities rather than their own forecasts. This change made buying debt in an asset-liability matching framework more appealing than equities.

The American Rescue Plan Act of 2021, the most recent Covid-19 pandemic relief bill, provides two forms of general funding relief for single-employer pension plans. It’s not clear yet if that may affect asset allocation decisions.

JPMorgan predicts that public pension funds run by states and local governments are also on course to shift more into fixed income. These public defined benefit plans, with about $4.5 trillion in assets, have a funding status that trails their private-sector peers, at about 60%.

“So public pension funds have less incentive to de-risk in general,” Panigirtzoglou wrote. “But they do face a problem. Their equity allocation is already very high and their bond allocation stands at a record low of 20%. So, from an asset/liability mismatch point of view they are under some pressure to buy bonds.”

On the surface, any preference of fixed income makes little sense. Since 2005, the Bloomberg Barclays U.S. Aggregate Bond Index increased about 5% annually, about half the S&P 500’s return. But when adjusted for volatility, equity performance was 23% worse than bonds.

While optimism about the bull market in stocks seems endless, aversion among pension funds persists. This month, Bank of America Corp.’s pension fund clients have been net sellers of stocks, extending a year-long trend of outflows.

What corporate pension plans “are looking for is to be well funded, not necessarily to get strong returns,” said Adam Levine, investment director of Aberdeen Standard Investment’s client solutions group. “It is possible that as rates rise, corporate pensions move enough to the fixed income that to some degree it counters the rise in rates. You can certainly make that case if the moves are big enough and the industry is big enough.”

So, bonds aren't dead, at least not at US corporate plans and increasingly not at public pensions either even if they are taking more risks (they still need to manage their liquidity).

Alright, let me wrap it up there and thank IMCO's President and CEO Bert Clark for sharing his insights with me.

Please take the time to read his comment carefully, it's not an easy read but it's very well written and he elucidates the main challenges of investing in this challenging environment.

I will post the C.D. Howe Institute fireside chat with Bert if it becomes publicly available. 

Below, a ACPM panel discussion featuring Patrick De Roy, Senior Managing Director, Total Portfolio & Capital Markets at IMCo; Eric Menzer, Global Head of OCIO and Fiduciary Solutions, Manulife Investment Management and Sadiq Adatia, Chief Investment Officer, Sun Life Global Investments. It was moderated by Zaheed Jiwani, CFA, Principal, Eckler (I discussed it earlier this week).

The major averages slipped on Friday as investors pored over a flurry of earnings results and a robust profit beat from e-commerce giant Amazon.

The S&P 500 fell 0.7% to 4,181.17, while the Dow Jones Industrial Average shed 185.51 points to close at 33,874.85. The Nasdaq Composite dropped 0.9% to 13,962.68.

Despite Friday’s weakness in equities, the S&P 500 notched its third straight month of gains in April, adding more than 5% to the index as investors bet on a big economic and profit recovery from the pandemic. The S&P 500 is now up 11% for the year. The benchmark closed at record levels on Thursday on the heels of blowout earnings results from Apple and Facebook.

The Dow rose about 2.7% this month, while the Nasdaq Composite gained 5.4% in April.

Amazon, the last of Wall Street’s mega-cap tech companies to publish results, reported a record first-quarter profit. The Seattle-based firm said profits more than tripled to $8.1 billion and January-to-March sales soared 44% to $108 billion. The results blew past Wall Street’s expectations with the company earning  $15.79 per share vs. the consensus estimate of $9.54.

Amazon’s results showed demand remained strong for its massive online retail business even as the economy started to open up some. Still, Amazon shares, up 40% in 12 months, closed in the red on Friday.

Twitter, meanwhile, moved in the opposite direction on user growth results and second-quarter revenue guidance that fell short of analysts’ forecasts. The social media platform said monetizable daily active users totaled 199 million during the three months ended March 31 and reported per-share earnings of 16 cents. Twitter plunged 14%.

Apple was coming under some slight pressure in the premarket after the European Union said the company’s App Store was breaching its competition rules. The shares were down 1.4%.

Exxon Mobil and Chevron were both trading lower after reporting before the bell. Chevron shares fell after quarterly EPS failed to exceed expectations.

More strong economic data was released on Friday, continuing a trend that’s lifted stocks all month. March spending jumped a better-than-expected 4.2%, while personal incomes surged by a massive 21.1% amid more fiscal stimulus.

The PCE price index for March increased 0.5% month-over-month and 2.3% on a year-over-year basis. The core PCE, excluding food and energy, rose 0.4% for March and 1.8% year-over-year. The PCE inflation metric is watched closely by the Federal Reserve and Chairman Jerome Powell warned earlier in the week it may show a transitory increase in prices.

The inflation numbers apparently weren’t as high as feared, as the 10-year yield remained flat after the numbers were released.

Kevin Stankiewicz of CNBC also reports Leon Cooperman sees stock market lower a year from now due to tax, rate, inflation pressures:

Billionaire investor Leon Cooperman told CNBC on Friday he expects the stock market will be lower than current levels one year from now.

Cooperman’s comments came one day after the S&P 500 notched yet another record close in 2021, finishing Thursday’s session at 4,211.47. The broad equity index has risen roughly 12% year to date and about 43% in the past 12 months.

“Let’s face it. The market is facing the fact that taxes are going up, interest rates are going up, and inflation is going up. And we have a reasonably richly appraised market. So cyclically I’m engaged. But I got an eye on the exit,” Cooperman said in an interview on “Squawk Box.”

“I suspect the market will be lower a year from today. But I don’t have to make that guess now. This is not going to end well,” the chairman of the Omega Family Office added. “But nobody, myself included knows when this is going to end. We just watch the things that would normally indicate an end.”

Cooperman said he considers himself to be “a fully invested bear,” while acknowledging the market has lately “done better than I would’ve thought.”

In an attempt to explain his positioning, Cooperman said, “Bear markets don’t materialize out of immaculate conception. They come about for certain fundamental reasons,” such an impending recession, “a hostile Fed” and “speculative valuation.”

“The market has been very self-corrective in the sense that the FAANG stocks are not expensive, but the aspiring FAANG stocks are very expensive and they’ve been corrected in a serious way,” he said. “The whole slowdown in the SPAC area is self-correcting,” Cooperman added, saying he doesn’t see the conditions currently that would lead to a significant market decline in the near term.

At the same time, Cooperman stressed that the pace of gains the market has seen after bottoming out in March 2020 following a coronavirus-driven plunge cannot continue forever.

“However, however — this is the big however — I think we should recognize we’re pulling demand forward and that the longer-term outlook is not particularly favorable, in my view,” he said.

Cooperman said his forecast on inflation is different from Federal Reserve Chairman Jerome Powell’s view. The top U.S. central banker has repeatedly said he thinks inflationary pressures will be “transitory” as the economy recovers from the Covid pandemic, while stressing that Fed expects to keep monetary policy accommodative for the foreseeable future.

“I think that Mr. Powell will be surprised by inflation. It’s not going to be as quiescent and transitory as he thinks. I think the Fed will be forced to say something before the end of 2022,” Cooperman said.

It was a big week for earnings as al the big tech companies reported and we also had a Fed meeting where Federal Reserve Chairman Jerome Powell said he does see some froth in “equity markets” and other places, but sought to attribute the conditions to factors beyond the central bank’s accommodative policy:

“Some of the asset prices are high. You are seeing things in the capital markets that are a bit frothy. That’s a fact. I won’t say it has nothing to do with monetary policy, but it also tremendous amount to do with vaccination and reopening of the economy,” Powell said during a news conference Wednesday.

“That’s really what has been moving markets a lot in the past few months, this turn away from what was a pretty dark winter to now a much faster vaccination process and a faster reopening, so that’s part of what is going on,” Powell continued.

While Powell didn't hint at tapering, on Friday, Dallas Federal Reserve Bank President Robert Kaplan called for beginning the conversation about reducing central bank support for the economy, warning of imbalances in financial markets and arguing the economy is healing faster than expected:

"We are now at a point where I'm observing excesses and imbalances in financial markets," Kaplan told the Montgomery Area Chamber of Commerce in a virtual appearance in front of a live audience, pointing to "historically" elevated stock prices, tight credit spreads, and surging house prices.

"I do think, at the earliest opportunity, I think it would be appropriate for us to start talking about adjusting those purchases," referring to the Fed's $120 billion in monthly bond buys that, along with near-zero interest rates, are aimed at keeping financial conditions super-easy and bolstering the recovery.

Fed Chair Jerome Powell earlier this week reiterated his view that it is too early to even talk about potentially tapering the Fed's pace of bond buying, saying the economy, though growing fast, is a "long way" from the Fed's goals of full employment and 2% inflation, and still needs the central bank's all-out support

Kaplan on Friday staked out a different view. He reiterated his expectation that the Fed will need to start raising interest rates next year, more than a year earlier than most of his Fed colleagues anticipate.

The Fed has promised to keep up its current pace of bond buying until the economy makes "further substantial progress" on its two goals.

Kaplan said Friday he now expects to reach the Fed's hurdle for beginning to reduce bond buys sooner than he had thought even just a few months ago. There is "upside" risk to his own forecast of 6.5% U.S. GDP growth this year, he said, also predicting unemployment, now at 6%, will fall to 4% by year's end.

The U.S. government reported Thursday that the economy grew at an annualized 6.4% pace in the first quarter; it will provide a readout for April's unemployment rate next Friday.

On inflation, Kaplan, like Powell and other Fed policymakers, said he expects inflation to surge in coming months simply in comparison to last year's very weak readings amid nationwide lockdowns. He predicted readings of 2.75% or more. Some of that pop will recede in the fourth quarter, he said, but he did not characterize inflation's rise as "transitory" as Powell has done.

"Some of these base effects will go away, but that's not to say that there aren't still strains," he said, pointing to an expected surge in consumer spending, supply shortages, rising materials costs, labor shortages, and fiscal spending.

I'm not sure if the Federal Reserve is really interested in tapering or just testing the market, but the market didn't react well today. 

Then again, a lot of the earnings news was sold, even on companies like Amazon, Facebook and Google that "smashed expectations" (Alphabet and Facebook shares had a strong week and held most of their gains).

Why? Because these stocks ran up since the end of March when I suspect elite hedge funds were snapping them up after a paltry quarter knowing full well Big Tech earnings were going to be stellar.

But the reaction to earnings varied. For example, Microsoft,Twitter and Ebay sold off after their earnings while Amazon didn't hold its gains today after surging in after hour trading yesterday.

You can tell big investors are worried and as I explained last week, with earnings finished and investor anxiety running high for a lot of reasons (taxes, high valuations, etc), we might be in for a sell in May and go away scenario.

I'm not sure. Quant funds are still long risk and long risky stocks and you have this ongoing speculative nonsense fueled by reddit/ WallSteetBets which I am convinced is a front for hedge funds that are pumping and dumping a handful of meme stocks.

This week it was Microvision (MVIS) which was pumped all the way up to $28 a share on massive volume before falling back down to earth on Friday after earnings proved it's all hype:

But  amazingly, these day trader YOLOers hedge funds just keep rotating from one speculative stock to another every other day and they easily pump and dump these stocks with impunity (where is the SEC??):

If you don't believe me, just check out the action on Ocugen (OCGN) which was up 6% on massive, massive volume today after being pumped to $19 a share last week before being dumped:

Unbelievably, this speculative biotech which has rights to some Indian vaccine called Covaxin was the number one traded stock today by a landslide.

And there are plenty of others that hedge funds pump and dump with impunity like Vaxart (VXRT) which was up huge this week:

I can give you a laundry list of speculative nonsense moving up and down on massive volume every day, my point is speculation still reigns in these frothy markets because short sellers were clipped as the Fed and other central banks backstop insanity!

You run more of a risk getting blood clots shorting these crazy speculative stocks than from the AstraZeneca or J&J vaccine!

When will this nonsense stop? Nobody knows but for now hedge funds are having a ball pumping and dumping stocks and there are plenty of people out there who take their investment advice from Reddit and other social media/ stock sites.

Scary but true and this "phenomena" seems like it's here to stay, until the next crash which will wipe all these investors day traders out.

All I know is investors and traders better get used to a very choppy market ahead:

The 2009/'10 bull peaked right about now, while the 1982/'83 bull was quite choppy going forward.

After an 87% rally, something to think about here and now. pic.twitter.com/CBuj01OGIq

— Ryan Detrick, CMT (@RyanDetrick) April 29, 2021

Below, CNBC's "Halftime Report" team discusses Big Tech earnings and outlook for stock performance.

Second, "the market is facing the fact that taxes are going up, interest rates are going up, and inflation is going up," billionaire investor Lee Cooperman told CNBC's "Squawk Box" Friday. "So cyclically I'm engaged. But I got an eye on the exit. And I suspect the market will be lower a year from today." 

Lastly, Jeff Gundlach, CEO of DoubleLine, joins BNN Bloomberg's Amber Kanwar to provide his outlook. He's concerned about the U.S. Federal Reserve's conviction on inflation, thinks U.S. stocks are very overvalued on almost all metrics, believes U.S. President Joe Biden's proposed capital gains tax hike is a negative, sees the US corporate tax rate rising to 25 per cent, and feels that Canadian housing affordability issues can create societal tension (also watch it here).

I don't agree with Gundlach's bearish views on the greenback (other countries are in the same boat and much worse) but he raises a lot of interesting points, so take the time to listen to him, especially toward the end when he talks about deteriorating housing affordability and how money printing is only exacerbating social tensions.

It's very rare that you will see Neil or any senior manager at PSP give an interview like this, so I pounced on the opportunity to listen to this a couple of times.

First, what I like about Neil is what you see is what you get. If he comes across as a solid leader who is  nice, thoughtful and down to earth, it's because that's how he is when you meet him and that's how I remember him since the time we worked together back in 2005-06.

Neil knows his stuff, he doesn't need to prove anything to anyone but he's always looking to learn and improve processes and the experience of working at PSP.

He began by stating it was four years ago that the Canadian Club of Montreal interviewed his predecessor André Bourbonnais who discussed expanding PSP's global footprint. 

"Since then, we opened New York, Hong Kong and London and have over 100 people total in those three offices and created new asset classes. Obviously, having boots on the ground there makes us more effective in terms of sourcing deals and seeing things before they get circulated to a broader audience."

PSP now has more than 1,000 employees and most of them are based in their head office here in Montreal.

Neil said he can unofficial state that PSP now manages over $200 billion as at the end of March (end of their fiscal year) and that they got "mostly the rebound, not the down" as their fiscal year started April 1st 2020.

"We are in very healthy shape fiscally and financially. We do take a long term view on our expansion globally as well as our efforts on diversity of thought and other forms of diversity."

He added: "We do attempt to be selective across those markets. We are big enough to invest everywhere but small enough (and smart enough) to not have to invest everywhere and compete head to head with people who are much bigger than us."

He noted however that PSP Investments is a young fund that is projected to reach a trillion dollars by 2060. "Unlike a lot of businesses, we really know where we will be in 10 years give or take what Mr. market decides to give us."  

On COVID, he said like everyone else, they pivoted to working from home and they had a "pretty good experience from a balance sheet perspective having learned lessons from the financial crisis, we did not get hit by a liquidity issue like we did back then."

He was very proud of the fact that PSP employees raised almost $1.2 million last fiscal year during two campaigns, one in the spring for COVID relief and one in the fall, their normal annual Centraide campaign. 

He rightly noted: "People in certain industries that have not been negatively affected need to pick up the slack because those that were affected couldn't contribute as much, so those of us who were not affected need to be even more generous than in the past so I was very proud of our employees who reached into their pocket to contribute."

PSP's challenges during COVID

Neil once again reiterated that in a crisis, "liquidity is king" and "what we found was our derivative exposure during the GFC, whether it was currency hedging or total return swaps (you have to cover the hedge) hurt us so we made far less use of them and used repos or bonds to cover our collateral calls and were well positioned to raise liquidity during that time."

He added: "We had a special committee of the board which met frequently but we actually didn't have to take action. The board was there standing by us but those are things you build up over time, you can't be ready for a crisis in week, it takes many years of preparation, risk and liquidity management and so on."

Then they turned their attention to employees where Neil admitted they struggled at first on how to train, onboard and communicate effectively with their employees.

He gave all their leaders credit and said they were able to get real time feedback from employees because their engagement survey was moved up to every six weeks not the "chunky" every 2 years.

Luckily, PSP did not lay off any employee during this pandemic and their turnover rate is at an all time low (how times have changed for the better!).

Working with peers on ESG disclosure

Neil also discussed how Canada’s top eight pensions issued rare joint call in November for better ESG disclosures.

He said they call each other "frenemies" as they are mostly friends but they compete on deals.

He said they meet periodically to talk about things where they have common interests. In the area of ESG reporting, they all have different mandates and taken different routes to a certain point but they all agreed that they needed to standardize ESG disclosure using the Sustainability and Accounting Standards Board, or SASB, and the Task Force on Climate-related Financial Disclosures, or TCFD.

He said "anyone in business has to recognize that customers, employees and suppliers are increasingly looking for progressive companies" and "if you're not part of that trend, we as investors have to say that company is going to be left behind. It's pretty much an unstoppable force than anyone in business has to take into account."

PSP Strategy Shift

Neil said their Vision 2021 strategy officially ended a month ago but they started 18 months ago on a new cycle, engaging not just their senior VPs but also another 60 employees under them. 

He said they boiled 27 trends they identified over time to 6 or 7 trends and highlighted some of them, like:

• The growth of Asian markets where you need boots on the ground, but mixed with that you have geopolitics. 
• He said we are in a low yield environment and even though inflation pressures are picking up, the inflation outlook remains muted.
• There's great competition for assets, huge amount of money in assets so how are you going to compete with those who can write bigger checks and do less due diligence.
• Global competition for talent hence the videos to attract people to PSP but also evolving technologies to give more people flexibility to work from home. He said most employees at PSP can do without the commute to the office (I personally hated it, see this clip from CBS Sunday Morning). 

Interestingly, he said they did away with their disaster recovery second site as they found it to be redundant and their employees take the office at home with them. They have a task force trying to figure out what needs to be done at the office versus what can be done at home.

The hard work in the shift in strategy is how to make them into "actionable plans".

He said they have three pillars and ten shifts and it permeates down the organization in terms of business plans. 

He also said "the focus has to to be on the total fund as every action has to serve the mother ship".

However, Neil did note the more challenging aspect at PSP is knowledge based decision making using actual data because they have all sorts of data sources that are literally all over the place and they don't talk to each other very well, so "job one is to  consolidate all that data to take actionable decisions (PSP needs to contact Mihail Garchev and the folks at ClearMacro).

Diversity and inclusion at PSP

Lastly, Neil talked about attracting and retaining talent at PSP but paid particular attention to diversity and inclusion.

He said earning the long term returns for beneficiaries is "job one" but they have put a ton of work into diversity and split themselves into 8 affinity groups and are more focused than ever on unconscious biases.

He said he believes than can lead by example and gave an example of an internship program specifically designed of  bringing in veterans at PSP since they manage the pension of the Canadian Forces.

"If you think about the qualifications of a veteran, it's completely different from the normal intake of someone coming from a business school who can do spreadsheets and waterfalls of calculations...what they are lacking is experience in leadership, teamwork and being calm in the face of a storm. Plus veterans tend to be older, they have a family and a mortgage, so the onboarding of these employees is very different."

So if PSP is successful in this program, they will share their experience with others.

By the way, a few veterans have disabilities so if successful, PSP can hire more people with disabilities and address another discriminatory factor in the workplace: ageism. 

I have a few excellent candidates in mind that PSP can hire (or rehire) to improve their workforce and Neil knows a few of them (others he doesn't).

Alright, let me wrap it up there but since we are on the topic of diversity and inclusion, over the weekend, Kim Thomassin, Executive Vice-President and Head of Investments in Québec and Stewardship Investing at CDPQ, was kind enough to get back to after reading my recent comment on CDPQ's 2020 Stewardship Report:

Merci beaucoup d’avoir partagé notre rapport d’investissement durable, c’est très apprécié. Comme tu l’imagines, il s’agit d’un travail qui a mobilisé beaucoup de personnes au sein de l’organisation au cours des dernières semaines, et l’équipe en est très fière. 

With respect to your point on people with disabilities, I completely agree with you that it is a crucial topic, and at CDPQ we take it very seriously, both internally and with our portfolio companies.

• Internally, our Action Plan for Persons with Disabilities 2021-2022 is accessible on our website that outlines the measures we are taking and planning to reduce barriers to the integration of people with disabilities; 
• Externally, the fund Equity 25^3 aims to encourage organizations to advance diversity and inclusion, broadly speaking. Although its focus is on women, Indigenous people and visible minorities, we leverage this fund to share our convictions on inclusion, including of course, of persons with disabilities.

I thank Kim for getting back to me and I am glad CDPQ is committed to diversity in all its forms, both internally and externally. 

I am a stickler on fighting discrimination in all its forms and will not back down on the importance of having a more diverse and inclusive workplace, especially when it comes to groups which our society routinely ignores and marginalizes. 

Below, take the time to watch a virtual discussion hosted by the Canadian Club of Montreal between Neil Cunningham, President and CEO of PSP Investments and Abe Adham, Managing Director and head of Quebec Investment Banking at TD Securities (fast forward to the 19 minute mark).

Also, sixty percent of working Americans say, ideally, they'll work from home or remotely at least part of the time post-pandemic. But will employees be able to decide if, or how frequently, they can skip the commute? And how will we adjust to being co-workers in an office once again? Correspondent Susan Spencer looks at how one company anticipates the challenges of a new work environment, and with experts who say it's important for our productivity, and our mental health, to head back to the office.

US-headquartered real estate firm Hines has launched a flagship fund for the Asia-Pacific region, Hines Asian Property Partners (HAPP), with a $400 million investment from Cadillac Fairview, the real estate investment arm of Canada's largest single employer pension scheme, Ontario Teachers' Pension Plan.

Cadillac Fairview is the lead founding investor in the fund, according to a statement released on Tuesday. The transaction probably marks its first capital deployment in the region.

HAPP will be be a multi-sector, open-ended, diversified vehicle targeting top-tier markets in Japan, Australia, South Korea, Singapore and China. The fund will invest in logistics, office, living, retail and select niche sectors targeting core plus returns.

"We believe that Asia will accelerate growth and diversification benefits to our portfolio with potential long-term outperformance,” said Duncan Osborne, executive vice president of Investments at Cadillac Fairview. 

Hines, which entered APAC in 1996 with a presence in China, has expanded throughout 13 cities across Australia, greater China, India, Japan, South Korea, and Singapore with $5.3 billion of assets under management. The firm has acquired or developed 17 projects totaling 14 million square feet.

In January this year, Hines roped in Chiang Ling Ng from M&G Asia as its chief investment officer for the Asia market. A month later, Hines appointed a director in its Seoul office, and an associate based in Tokyo.

The firm's investment in the region include One Horizon Centre commercial building and office projects in Gurugram and Bengaluru India.

Meanwhile, the C$221 billion ($179.4 billion) Ontario Teachers' Pension Plan opened its Singapore office in Singapore last year to accelerate investments in India, Australia, New Zealand, and Southeast Asia. The pension fund's APC headquarters is located in Hong Kong which was set up in 2013.

Cadillac Fairview manages over C$36 billion of assets in the Americas and the United Kingdom.

Katherine Feser of the Houston Chronicle also reports Hines launches fund to invest in Asia-Pacific region:

Houston-based Hines has launched a fund, backed by a major Canadian pension investor, aimed at investing in properties across the Asia-Pacific region. Cadillac Fairview, the real estate investment arm of Ontario Teachers’ Pension Plan, provided $400 million in capital for the fund.

The Hines Asia Property Partners fund will have an initial capacity to invest approximately $900 million in markets including Japan, Australia, South Korea, Singapore, China and Hong Kong, according to Hines. The fund will focus on assets designed for future tenant demand. This includes logistics, office, residential, retail and other niche properties.

“We are very pleased to partner with such a prominent like-minded institutional investor like Cadillac Fairview to launch our flagship fund in Asia. We look forward to creating value for our current and future investors, project partners, and communities through the fund’s investments,” Hines Global Chief Investment Officer David Steinbach said in an announcement. “Our long-established teams in the Region have already started to identify and secure opportunities that are emerging post-COVID across Asia-Pacific.”

Hines, which entered China more than 25 years ago, has developed or acquired 1,450 properties totaling more than 485 million square feet worldwide since being founded in 1957. 

Duncan Osborne, executive vice president of investments at Cadillac Fairview, said the firm has a relationship with Hines dating back two decades and investing in Asia "will accelerate growth and diversification benefits to our portfolio with potential long-term outperformance.”

The new fund follows the formation of a joint venture between Hines and the National Pension Service of Korea last year to develop as much as $5 billion worth of commercial real estate worldwide, including projects in the Asia-Pacific region. The partners said that venture would address the demands of modern spaces.

OTPP's real estate subsidiary, Cadillac Fairview, put out a press release on this deal earlier today:

Hines, the international real estate firm, today announced the launch of Hines Asia Property Partners (HAPP), the firm’s new flagship fund for the Asia-Pacific Region with $400 million of capital from Cadillac Fairview, the real estate investment arm of Ontario Teachers’ Pension Plan, the largest single profession pension plan in Canada. The fund will be a multi-sector, open-ended, diversified vehicle targeting top-tier markets in Japan, Australia, South Korea, Singapore and China (including Hong Kong).

HAPP intends to invest in logistics, office, living, retail and select niche sectors to build a diversified portfolio targeting core plus returns and balancing yield and growth. By focusing on next generation assets designed for future tenant demand, this fund will aim to capitalize on an attractive pricing environment and fundamental market shifts by leveraging Hines’ operating platform to create value at the asset level through active management and select development.

“We are very pleased to partner with such a prominent like-minded institutional investor like Cadillac Fairview to launch our flagship fund in Asia. We look forward to creating value for our current and future investors, project partners, and communities through the fund’s investments,” said David Steinbach, Hines Global Chief Investment Officer. “Our long-established teams in the Region have already started to identify and secure opportunities that are emerging post-COVID across Asia Pacific.”

 Cadillac Fairview, the real estate investment arm of the C$221 billion Ontario Teachers’ Pension Plan, is the lead founding investor.

“We are delighted to invest in Hines Asia Property Partners as a lead founding investor, and we believe that Asia will accelerate growth and diversification benefits to our portfolio with potential long-term outperformance,” said Duncan Osborne, Executive Vice President of Investments at Cadillac Fairview. “Our relationship with Hines dates back two decades and they have a proven track record as a trusted manager and operator with demonstrated history of successfully executing investments through their local market teams.”

HAPP will leverage Hines’ boots-on-the-ground experience in the region. The firm first entered in China over 25 years ago. Since 1996, Hines has expanded throughout 13 cities across Australia, China (including Hong Kong), India, Japan, South Korea and Singapore, with $5.3 billion of assets under management. HAPP will have oversight from a team of seasoned investment management professionals, comprised of David Steinbach, Global Chief Investment Officer and Co-Head of Investment Management; Chris Hughes, CEO of the Capital Markets Group and Co-Head of Investment Management; Chiang Ling Ng, Chief Investment Officer of Asia; Ray Lawler, CEO of Hines Asia Pacific Region and Simon Shen, HAPP Fund Manager, totaling over 100 years of career experience.

Chiang Ling Ng, who recently joined Hines from M&G, and now serves as the firm’s Chief Investment Officer, Asia, added, “This is such an exciting time to be beginning my tenure at Hines. The expertise of the team, in addition to the strength and confidence we instill in our investment partners, while leveraging our proprietary research, will enable us to quickly deploy capital and execute key off-market transactions across multiple locations and sectors. I look forward to working closely with the team to continue to elevate Hines’ platform and serve Hines investors in this region.”

 With HAPP, Hines will continue its expansion in the region and further demonstrate the firm’s commitment to become vertically integrated throughout Asia Pacific by elevating the investment management platform and capitalizing on opportunities in the region. In the current economic outlook, investors are increasing their focus and allocations toward Asia which offers strong underlying economic growth and the potential attractive risk-adjusted returns that present Hines and its investors with compelling opportunities in Asia.

 About Hines

Hines is a privately owned global real estate investment firm founded in 1957 with a presence in 240 cities in 27 countries. Hines oversees a portfolio of assets under management valued at approximately $160.9 billion¹, including $81.7 billion in assets under management for which Hines serves as investment manager, and $79.2 billion representing more than 172.9 million square feet of assets for which Hines provides third-party property-level services. Historically, Hines has developed, redeveloped or acquired approximately 1,450 properties, totaling over 485 million square feet. The firm has more than 180 developments currently underway around the world. With extensive experience in investments across the risk spectrum and all property types, and a pioneering commitment to ESG, Hines is one of the largest and most-respected real estate organizations in the world. Visit www.hines.com for more information. ¹AUM includes both the global Hines organization as well as RIA AUM as of December 31, 2020.

 About Cadillac Fairview

Cadillac Fairview (CF) is a globally focused owner, operator, investor and developer of best-in-class real estate across retail, office, residential, industrial and mixed-use asset classes. Wholly owned by the Ontario Teachers' Pension Plan, CF manages in excess of C$36 billion of assets across the Americas and the United Kingdom, with further expansion planned into Europe and Asia.

Internationally, CF invests in communities with like-minded partners, including Stanhope in the UK, Lincoln Property Company in the U.S., and Multiplan in Brazil. The company's Canadian portfolio comprises 69 landmark properties, including the Toronto-Dominion Centre, CF Toronto Eaton Centre, Tour Deloitte, CF Carrefour Laval, CF Chinook Centre and CF Pacific Centre. 

Continually striving to make a positive impact in communities where it operates by promoting social connection, growth, and a sustainable future, CF's Purpose is Transforming Communities for a Vibrant Tomorrow. Learn more at cadillacfairview.com and follow CF on LinkedIn, Twitter, and Instagram.

This is a huge deal for OTPP as its real estate subsidiary, Cadillac Fairview, is partnering up with a great partner, Hines, to expand into the Asia-Pacific region.

Go back to read my comment on OTPP's 2020 results when I pointed out that there was a diversification problem in Teachers' real estate holdings:

[...] it's Teachers' Real Estate that posted the biggest declines last year, -13.7%, and it's important to understand why:

Operating income was $0.8 billion,30% lower than 2019 due to rent abatements and lower occupancy, particularly for Canadian retail, which was significantly impacted by mandatory COVID-19 shutdowns causing extended mall closures, lower tenant sales revenues, tenant bankruptcies and a worsened outlook over the short term. Net real estate loss of $4.1 billion for 2020 was $5.6 billion lower than 2019 due to significant valuation losses for Canadian retail, a decline in Macerich and Multiplan shares and a substantially weaker Brazilian Real.

At year end, the retail occupancy rate (spaces less than 15,000 square feet and for lease terms greater than one year) was 85% (91% in 2019), while the office occupancy rate was 94% (93% in 2019). Decline in retail occupancy was partially offset by short-term occupancy (lease terms of less than one year) of 6% in response to challenges and uncertainty created by COVID-19. Canadian office properties were not significantly impacted by pandemic shutdowns since tenants continued to honour their rent obligations and the positive view on the long-term value of office markets has persisted.

The construction of two major office projects was completed in 2020: 16 York Street and 33 Dundas Street West, both in Toronto. Development of a third major office complex, 160 Front Street West in Toronto, continued with minor pandemic-related delays. In line with Cadillac Fairview’s focus on scaling and diversifying its global real estate platform, it acquired White City Place in London, UK.

I must say, Cadillac Fairview really needs to scale and diversify its global real estate portfolio. When I saw this, I was dumbfounded:

Importantly, 55% in Canadian Retail and 30% in Canadian Office and 7% Emerging Markets? Where is the geographic and sector diversification? What about US, European, Asian and Australian exposure and what about logistics and multi-family and other sectors?

I'm missing something here and there aren't enough details in the Annual Report or on the Cadillac Fairview website. 

How can it be that in 2021, OTPP's real estate portfolio is still so concentrated in Canada (they need to follow BCI's QuadReal and diversify it a lot more).

I understand, liabilities are in Canadian dollars but if it's one thing that Canada's large pensions are good at it's geographic and sector diversification.

Now, to be fair, the pandemic hit Retail real estate assets especially hard and they will bounce back eventually but there's still a tremendous amount of work that needs to be done at Cadillac Fairview to divest from Retail and diversify the portfolio geographically and in terms of sectors.

Again, I might be missing something here but I was shocked reading only 2% of Real Estate assets are in the US and only 1% in the UK, and most are Canadian malls and offices.

After reading my comment, OTPP's CIO Ziad Hindo shared additional insights on OTPP's real estate portfolio:

Regarding your question about real estate, we have a very strong and seasoned team at Cadillac Fairview (CF) that we work very closely with. I have included some additional notes on CF/real estate below: 

1. CF is building up capabilities internationally (London to cover Europe and Singapore to cover Asia). They have just hired heads of Europe. They have also identified strong local partners to deploy capital with. 
2. Also in the US, CF is establishing a presence in multi-family having acquired a large stake into Lincoln (One of the largest multifamily operators in the US). 
3. In the US, they’re also focusing on deploying capital into the Life Sciences real estate sector. 
4. CF will also augment its strong asset base in Canada by diversifying geographically and through different sectors. 
5. CF is also diversifying its Canadian assets by densifying its retail assets. An example is the residential development in Richmond mall/BC.CF has always been a top notch operator and developer, and the densification program of its shopping malls is going to be quite extensive over the next few years. 
6. Despite the headwinds suffered as a result of the pandemic, Teachers’ has done exceptionally well since buying CF and making it its wholly owned real estate subsidiary in in 2000 with strong and consistent returns. 
7. Teachers’ intends to add to its real asset exposure, both infrastructure and real estate (through CF). We’re clearly attracted to the stable, inflation linked cashflows (particularly given the reduction in Fixed Income exposure). 
8. Also worth highlighting the progress we’ve made in infrastructure investing as a result of our desire to increase exposure to real assets with significant acquisitions (Caruna, SGI, Enwave (Canada), ADNOC and Equis in Asia, all done over the past 12 months). 

No doubt, prior to the pandemic, Cadillac Fairview was delivering consistently strong results, but the pandemic exposed some fundamental problems, namely, lack of geographic and sector diversification.

With this bold new venture into the Asia-Pacific property market, OTPP is taking the much needed steps to diversify its real estate holdings outside of Canada into Asia.

And it chose a solid partner in Hines to do this properly:

HAPP will leverage Hines’ boots-on-the-ground experience in the region. The firm first entered in China over 25 years ago. Since 1996, Hines has expanded throughout 13 cities across Australia, China (including Hong Kong), India, Japan, South Korea and Singapore, with $5.3 billion of assets under management. HAPP will have oversight from a team of seasoned investment management professionals, comprised of David Steinbach, Global Chief Investment Officer and Co-Head of Investment Management; Chris Hughes, CEO of the Capital Markets Group and Co-Head of Investment Management; Chiang Ling Ng, Chief Investment Officer of Asia; Ray Lawler, CEO of Hines Asia Pacific Region and Simon Shen, HAPP Fund Manager, totaling over 100 years of career experience.

I also find it interesting that Hines and the National Pension Service of Korea struck a joint venture last year to develop as much as $5 billion worth of commercial real estate worldwide, including projects in the Asia-Pacific region. 

That tells me Hines is cementing a leading position in the region and partnering up with the right long-term partners to acquire and develop properties in the region. 

All in all, this is a great deal for OTPP, Hines and the pension plan's beneficiaries.

Jo Taylor was nominated CEO of OTPP to build its global brand and expand its global investments and this is exactly what he's doing. 

I expect this to be the first of many new property deals in the region.

John Sullivan, President and CEO of Cadillac Fairview, has a big job repositioning that portfolio to diversify it across geographies and sectors but they are well on their way and need to keep doing big deals like this with the right partners.

Below, Gerald D. Hines, the founder and chairman of the Hines real estate firm, died last year at the age of 95. Watch a clip about this remarkable man.

Also, watch a clip on Hines' global real estate platform featuring insights from Jeff Hines, Chairman and CEO, as well as others. 

This is a powerhouse real estate firm to partner up with, one that OTPP's Cadillac Fairview chose carefully and I expect Hines Asian Property Partners (HAPP) will grow by leaps and bounds over the next decades.

Today, American Tower Corporations (ATC) has announced that they have struck a deal with Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ) for the sale of a 30% stake in their European business, ATC Europe. 

The transaction will be for €1.6 billion, giving ATC Europe a total valuation of €8.8 billion.

ATC will retain managerial and operational control of ATC Europe, while CDPQ will gain seas on the company’s Board of Directors and certain governance rights. 

The deal comes a number of months after ATC signed a $9.4 billion deal with Telefonica to acquire their independent tower infrastructure company Telxius, which has tower assets in both Europe and Latin America. The acquisition, which is still pending, will see ATC’s European tower portfolio increase in size to around 30,000 communications sites.

"We are pleased to partner with CDPQ in Europe, where we expect to create tremendous value. CDPQ's extensive infrastructure experience, deep knowledge of the region and long-term investment philosophy are in close alignment with American Tower's European strategy, operational excellence and long track record of historical success,” said American Tower’s president and CEO, Tom Bartlett. “This transaction not only contributes to the funding of our pending Telxius acquisition, which will transform our scale and leadership position in highly attractive markets like Germany and Spain, but also creates a solid, adaptable framework through which future expansion opportunities can be evaluated and financed."

The deal is expected to close in the third quarter of 2021, subject to regulatory approval.

For CDPQ, this move represents their growing interest in the telecommunications infrastructure at an international level. While the fund already has various telecoms infrastructure assets under its wing, perhaps the clearest indication of their telecoms focus in recent years came in March earlier this year, when the pension fund stuck a deal with Telefonica to launch a 50-50 wholesale joint venture in Brazil, set to be named FiBrasil.

The investor’s interest in the telecoms sector has not gone unnoticed, with struggling Indian telco Vodafone Idea noting CDPQ as one of a number of pension funds they were approaching to help them raise $1 billion to stay afloat. 

Telecoms infrastructure investments have become a very hot topic over the past year, with operators around the world offloading their tower infrastructure in order to raise money for expensive fibre and 5G rollouts. Cellnex’s €9 billion purchase of CK Hutchison’s European tower assets last year was perhaps the trend’s biggest example, but there are numerous examples of similar transactions, from Vodafone preparing to float its tower subsidiary Vantage Towers, to MTN selling its towers in South Africa and Indosat selling theirs in Indonesia.  

Earlier today, CDPQ put out this press release covering this deal:

American Tower Corporation (NYSE: AMT) and Caisse de dépôt et placement du Québec (CDPQ), a global investment group, today announced that CDPQ will acquire a 30% stake in ATC Europe as part of a new long-term strategic partnership through a transaction valued at over €1.6 billion, implying an enterprise value of more than €8.8 billion for ATC Europe. Pursuant to the partnership agreement, American Tower will retain managerial and operational control, as well as day-to-day oversight of ATC Europe, while CDPQ will obtain seats on ATC Europe’s Board of Directors, along with certain governance rights.

The transaction will position American Tower and CDPQ to jointly benefit from sustainable, long-term secular wireless growth trends in select European markets as 5G deployments and demand for communications infrastructure accelerate. ATC Europe’s portfolio, pro forma for the closing of American Tower’s pending Telxius acquisition, will consist of nearly 30,000 communications sites.

Tom Bartlett, American Tower’s President and Chief Executive Officer, stated,“We are pleased to partner with CDPQ in Europe, where we expect to create tremendous value. CDPQ’s extensive infrastructure experience, deep knowledge of the region and long-term investment philosophy are in close alignment with American Tower’s European strategy, operational excellence and long track record of historical success. This transaction not only contributes to the funding of our pending Telxius acquisition, which will transform our scale and leadership position in highly attractive markets like Germany and Spain, but also creates a solid, adaptable framework through which future expansion opportunities can be evaluated and financed.”

Emmanuel Jaclot, CDPQ’s Executive Vice-President and Head of Infrastructure, said,“Through this new long-term strategic partnership with American Tower, CDPQ is thrilled to play an active role in establishing one of Europe’s largest independent communications infrastructure providers. This dedicated growth platform with a global leader enables us to increase our exposure in key European markets — including Germany, France and Spain — while contributing to the development of critical carrier-neutral telecom networks, at a time where telecommunications needs are more important than ever.”

BofA Securities, Inc. and CDX Advisors are serving as financial advisors to American Tower. HSBC is serving as financial advisor to CDPQ. The transaction is expected to close in the third quarter of 2021, subject to customary closing conditions, including regulatory approvals.

Cautionary Language Regarding Forward-Looking Statements

This press release contains statements about future events and expectations, or “forward-looking statements,” all of which are inherently uncertain. We have based those forward-looking statements on management’s current expectations and assumptions and not on historical facts. Examples of these statements include, but are not limited to, statements regarding the proposed closing of the transaction described above and the value and future investment activities of ATC Europe. These forward-looking statements involve a number of risks and uncertainties. For important factors that may cause actual results to differ materially from those indicated in our forward-looking statements, we refer you to the information contained in Item 1A of our Form 10-K for the year ended December 31, 2020 under the caption “Risk Factors” and in other filings we make with the Securities and Exchange Commission. We undertake no obligation to update the information contained in this press release to reflect subsequently occurring events or circumstances.

About American Tower

American Tower, one of the largest global REITs, is a leading independent owner, operator and developer of multitenant communications real estate with a portfolio of approximately 187,000 communications sites. For more information about American Tower, please visit the “Earnings Materials” and “Investor Presentations” sections of our investor relations website at www.americantower.com.

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.

Why is telecom so big now? As the first article notes, Telecoms infrastructure investments have become a very hot topic over the past year, with operators around the world offloading their tower infrastructure in order to raise money for expensive fibre and 5G rollouts. 

Mack Burke of Commercial Observer reports Bridge Industrial and PSP Investments supply $1.4B for UK industrial assets:

Bridge Industrial and the Canadian pension fund, Public Sector Pension Investment Board (PSP Investments), have partnered to deploy around $1.4 billion into the acquisition and development of last-mile warehousing and distribution facilities in, and around, London and the Midlands region of the United Kingdom, according to information released on Thursday. 

The duo will look for urban infill investment and development opportunities to build out its portfolio, targeting that $1.4 billion number as the potential size of the collection they hope to assemble.

According to the duo’s announcement, they will focus on “build-to-core” opportunities, which will revolve around last-mile facilities in “high barrier infill submarkets” around London and the Midlands region, which includes Birmingham and its surrounding towns — England’s second-largest metropolitan area. 

Bridge Industrial, an investment and development firm founded in 2000, that has executed on more than $7.8 billion worth of industrial real estate in its time, will oversee all development activities and “value-add measures” for purpose-built properties.

Bridge Industrial CFO Sean Zasche expressed the firm’s excitement in forming the joint venture with PSP Investments, adding that his firm “continues to grow its global portfolio and capital partnerships … [PSP’s] focus on high-quality, infill real estate and long-term ownership aligns well with Bridge’s business model.” The firm’s operations in the U.K. are led by Partner Paul Hanley, who heads up a group of investment and development pros based out of its London office.

“We’re extremely excited about the growth in the logistics industry that is creating strong demand for facilities across the United Kingdom,” Hanley said. “This joint venture with PSP Investments marks the beginning of a long-term partnership that will allow us to continue the strategic expansion of our portfolio.”

PSP Investments is one of Canada’s largest investment managers, sporting a whopping $169.8 billion in net assets under management, with about $24 billion of that concentrated in real estate — about 19 percent of the real estate book is in the industrial sector— according to its 2020 annual report. Last year, the pension fund investor, which has a sizable portfolio of industrial assets, actually made some big splashes within the film studio front, investing, as part of a massive consortium, in Amazon Studios’ Culver City campus and Manhattan Beach Studios; it also picked up a minority interest in CBS Television City studio complex in Los Angeles. On the industrial front last year, it engaged in a number of large transactions globally, including in Europe and Mexico. 

“We are pleased to be partnering with Bridge to invest in the U.K. logistics sector as we grow our already extensive European logistics portfolio,” said Stéphane Jalbert, a managing director at PSP, who covers real estate investments in Europe and Asia Pacific. “Urban logistics is a key sector for PSP globally, given the accelerated growth of e-commerce and the need to adapt real estate to meet shifting consumer behavior. Bridge has proven development capabilities from which the venture will benefit, enhancing returns beyond the sector trend.”

Rob Kozlowski of Pensions & Investments also reports PSP Investments targets UK real estate with joint venture:

This is a great deal for PSP Investments in the red-hot logistics area. 

Why logistics? Stéphane Jalbert, PSP’s Managing Director for Europe and Asia Pacific, Real Estate Investments states it in the press release: “Urban logistics is a key sector for PSP globally, given the accelerated growth of e-commerce and the need to adapt real estate to meet shifting consumer behaviour. Bridge has proven development capabilities from which the venture will benefit, enhancing returns beyond the sector trend.”

Founded in 2000, Bridge Industrials (Bridge) is a vertically integrated real estate operating company and investment manager focused on the development and acquisition of industrial properties in supply-constrained core markets in the US and the UK.

The company has six offices spread across the US and one in London.

Bridge leverages its local offices and expertise to identify, execute and manage opportunities on behalf of its institutional capital partnerships.

It manages investment vehicles across the risk/return spectrum and focuses on three main strategies:

• Build-To-Core: Development of irreplaceable infill industrial properties for long-term ownership and cash flow.
• Value-add: Acquiring existing infill industrial properties to create value through leasing, redevelopment, and capital improvements.
• Core/ Core-Plus: Acquire best-in-class industrial properties in Bridge’s core infill markets to benefit from long-term ownership and cash flow.

The joint venture with PSP has a build-to-core focus, including the acquisition and development of last-mile logistics assets within high-barrier infill submarkets in Greater London and the Midlands region. 

Bridge will oversee development and the implementation of value-add measures to create state-of-the-art, purpose-built infill industrial assets. The venture will target market-leading sustainability credentials.

The joint venture is targeting a portfolio value of £1 billion ($1.4 billion USD) to acquire and develop logistics properties in the United Kingdom, which is a sizable deal for PSP and especially for Bridge.

In fact, since its inception in 2000, Bridge has successfully acquired and developed more than 48 million square feet of industrial buildings/projects valued at more than $7.8 billion. 

So a $1.4 billion joint venture with a pension fund the size of PSP is a big deal, I'm pretty sure it's the only joint venture Bridge has done with a large pension (from what I can see). 

In PSP, Bridge gains a solid long-term strategic partner as it looks to grow its global portfolio and capital partnerships.

For PSP, it gains the operational expertise of this real estate company which specializes in logistics properties and it can develop a long-term relationship with it and really leverage off this relationship given the sizable commitment it is making in this joint venture.

Lastly, as stated above, PSP has roughly 19 percent of its $24 billion real estate book in the industrial sector as at March 30, 2020 (new fiscal year results are not released yet).

It's important to note, PSP's massive real estate portfolio is very well diversified across geographies and sectors, an approach that goes back to the days Neil Cunningham, its CEO, was in charge of that portfolio as they diversified it based on long-term secular trends. 

That tells me PSP's real estate portfolio most likely didn't experience the same hit that some of its large Canadian peers experienced last year but I'm just guessing as the official results aren't out yet.

Below, over 900 people registered for Colliers latest UK Industrial and Logistics webinar which took place earlier this year. Take the time to watch this, it's excellent and provides great insights.

Also, earlier this week, PSP Investments' President and CEO, Neil Cunningham, was interviewed in a virtual event hosted by the Canadian Club of Montreal. I wrote about it here and you can watch it below.