Thursday, July 28, 2016

Brexit's Biggest Fans in Big Trouble?

Andre Tartar and Jill Ward of Bloomberg report, Brexit’s Biggest Fans Face New 115 Billion-Pound Pension Hole:
Turning 65 in the U.K. used to mean mandatory retirement and a future of endless holiday. But in 2016 it has come to signify a very different cut-off: membership in the single most pro-Brexit age group in the June 23 European Union referendum.

About 60 percent of Britons 65 and older voted to leave the world’s largest trading bloc in the recent vote, the most of any age group, according to two separate exit pollsThe glaring irony is that senior citizens are also the most reliant on pensions, which face a worsening funding gap since the Brexit vote.

The combined deficits of all U.K. defined-benefit pension schemes, normally employer-sponsored and promising a specified monthly payment or benefit upon retirement, rose from 820 billion pounds ($1.1 trillion) to 900 billion pounds overnight following the referendum, according to pensions consultancy Hymans Robertson. Since then, it has grown further to a record 935 billion pounds as of July 1.


A sharp drop in U.K. government bond yields to record lows, and a similar decline in corporate bond yields, is largely to blame for the uptick in defined-benefit pension liabilities. That’s because fixed income represented 47.5 percent of total 2014 assets for corporate pensions funds, of which about three-quarters were issued by the U.K. government and/or sterling-denominated, according to the 2015 Investment Association Annual Survey.

And the slump may not be over yet. While the Bank of England held off on cutting rates or increasing asset purchases at its July 14 meeting, early signals point to serious pain ahead for the U.K. economy. If additional quantitative easing is ultimately required to offset growing uncertainty, this would suggest “that bond yields are going to fall, which makes pensions a lot more expensive to provide,” former pensions minister Ros Altmann told Bloomberg. “Deficits would be larger if gilt yields fall further.”

Beyond gilt yields, Altmann said that anything that damages the economy is also bad news for pensions. The country’s gross domestic product is now expected to grow by 1.5 percent this year and just 0.6 percent in 2017, according to a Bloomberg survey of economists conducted July 15-20. That’s down from 1.8 percent and 2.1 percent, respectively, before the Brexit vote.


A weaker economy means companies will be less able to afford extra contributions precisely when pension schemes face a growing funding gap, possibly threatening future payouts to pensioners and creating a vicious feedback cycle. “If companies have got to put even more into their pension schemes than they have previously while their business is weakening, then clearly their business will be further weakened,” Altmann said.

Bad news, in other words, for Brexit’s biggest supporters.
Very bad news indeed but I guess British seniors weren't thinking with their wallets as I thought they would when they decided to vote for Brexit.

Zlata Rodionova of the Independent also reports, Brexit supporters hit with record £935bn pension deficit because of the EU referendum:
The UK pension deficit hit a record level of £935 billion following UK’s vote to leave the EU, likely hitting pro-Brexit voters the hardest.

Support for the UK to leave the EU bloc grew with each age category, peaking at 60 per cent among those aged 65 and over, according to a survey of 12,356 referendum voters by Lord Ashcroft.

Ironically, the same voters are reliant on defined benefit pension to deliver their retirement income.

But UK’s pension deficit rose from £830 billion to £900 billion overnight following the EU referendum.

The vote then pushed the gap further to £935 billion as of July 1, according to Hymans Robertson, an independent pension’s consultancy, making it responsible for £115 billion of debt.

Gilt yields, the assets used to help value the cost of future payments, tumbled in the aftermath of the June 23 referendum, as investors bolted in favour of assets with a reputation for safety, putting more pressure on the pension industry.

Record lows in gilt yields in turn pushed the liabilities of UK pension schemes up to an all-time high £2.3 trillion on July 1.

“The gyrations in UK pension deficits are eye-watering. But one of the biggest factors that will determine whether or not pensions are paid to scheme members in full will be the health of the sponsoring company post Brexit,” Patrick Bloomfield, partner at Hymans Robertson, said.

Ros Altman, the former pensions minister, warned pensions could be under threat from the economic turmoil following UK’s vote to leave the EU.

“Good pensions depend on a good economy. Markets don’t like uncertainty, and we are clearly in unchartered territory,” Altmann said at an event in London.

“I hope we will get the political turmoil settled soon and do what we really need to be doing -which is making good policy for everyone in the country - who hopefully one day will be a pensioner if they aren’t one already,” she added.

As British businesses struggle to plan for an uncertain future in the aftermath of Britain’s decision to leave the EU, a worsening funding gap can reduce their scope to borrow money, curb their ability to invest and act as barrier to mergers and acquisitions.

High profile companies Tata Steel and BHS already showed evidence of the impact of pension deficits on investments and deal making this year.

The British Steel pension scheme, backed by Tata, has an estimated deficit of £700 million which has complicated the quest to find a new owner for Tata’s factories.

BHS’s pensions scheme had a £571 million hole when it collapsed. The risk of taking on the pensions burden is thought to be one of the reasons behind BHS’s failure to find backers or buyers for the business as a whole.
The fallout from Brexit on UK pensions is even more widespread than these articles suggest. Rob Langston of Raconteur reports, Brexit shock wave hits pension investors:
The full impact of Britain’s vote to leave the European Union has still to be felt, but uncertainty continues to affect pension investments as challenging times may lie ahead.

Pensions may not have been at the front of many people’s minds when entering the polling booths on June 23, but the Brexit referendum result is likely to have a lasting impact on pension schemes for years to come.

The immediate aftermath saw sterling plunge and markets fall, taking a toll on investors’ savings. But the longer-term effect may be just as significant.

While the impact of the EU referendum on markets may have trustees and pension scheme members seeking out the latest performance of their investments, there have been implications for the pension industry as a whole.

Ongoing annuity rates

For some scheme members close to retirement, the referendum result has had a major impact on their choices as annuity rates fell sharply post-Brexit.

“The cost of buying an annuity has got more expensive for DC [defined contribution] members close to retirement,” says Joanna Sharples, investment principal at consultancy Aon Hewitt. “Post-Brexit it will be really interesting to see how this translates across different annuity providers; however, quotes from one provider suggest that annuities are about 4 per cent more expensive, which is quite meaningful.”

Yet, the introduction of pension freedoms in April 2015 may have offered members a wider range of choices to mitigate the referendum result. Data from insurer and long-term investments industry body ABI suggests that annuity-buying activity has fallen away since the introduction of pension freedoms, with income drawdown products enjoying a corresponding rise in take-up.

Pension freedoms are likely to have a bearing on the type of investment decisions that are made in the post-referendum period, opening up opportunities to members they may not have enjoyed in previous years.

“Pensions freedoms have put existing default life cycles into question and there has been a sizeable shift from annuities to drawdown,” says Maya Bhandari, fund manager and director of the multi-asset allocation team at global asset manager Threadneedle Investments.

“We are now able to start on a blank sheet of paper and ask two crucial questions: what do people want and what do they need? Ultimately what people need is relatively simple tools and solutions that help them identify, manage or mitigate the three risks they face in retirement – financial market volatility, real returns and longevity.”

Brexit-proofing pensions

In light of the uncertainty brought about by Brexit, more scheme members might choose to take greater control over their pension savings. So-called Brexit-proofing pensions may appeal to many investors, although they will face a number of challenges.

“Pensions freedoms are still relatively new, which means people are currently faced with very mixed messages about how best to act in times of market uncertainty,” says Catherine McKenna, global head of pensions at law firm Squire Patton Boggs.

“We already know that one of the biggest trends of 2015 was the rise of the pensions scam and individuals should be careful to guard against Brexit uncertainty being used as a trigger to cash out their fund if this isn’t right for them.”

While the referendum decision and subsequent government shake-up may have ramifications for pension freedoms, any changes to existing pension legislation are unlikely to emerge in the immediate aftermath of the leave vote.

“In terms of legislation on pension freedoms, it is unlikely that the government will look to repeal what is already in place but, irrespective of Brexit, there may be further regulation to impose better value by reducing charges and product design for freedoms to develop,” says Ms McKenna.

Taking greater control of investment decisions in the current environment may pose a number of challenges, however, particularly with the increased level of volatility in markets seen in the wake of the result.

“From an investment perspective, Brexit has created much greater uncertainty and volatility in the markets, and made them more than usually reactive to political events,” says James Redgrave, European retirement director at asset management research and consultancy provider Strategic Insight.

“The FTSE 100 fell 500 points on June 24 – below 6,000 – and savers entitled to access their pots were advised to wait to take cash, if they could afford to do so.

“These markets have settled largely on the quick and orderly transition to a new government, after David Cameron’s resignation, and will have been buoyed by the Bank of England’s conclusion that an interest rate cut is not economically necessary.”

James Horniman, portfolio manager at investment manager James Hambro & Partners, says: “Investors have to position portfolios sensibly with insurance against all outcomes. Sterling is likely to come under continued pressure and there will almost certainly be volatility.

“As long as valuations are not unreasonable, it makes sense to weight any UK equity holdings towards businesses with strong US-dollar earnings rather than those reliant on raw materials from overseas – companies forced by adverse currency movements to pay extra for essential inputs from elsewhere in the world could see their profits really squeezed.”

The impact of home bias is likely to take a toll on some pension investments as fund managers have warned of being too exposed to the UK market. Under normal circumstances higher UK equities exposure may be expected, but the uncertainty introduced by the referendum result in local markets may harm returns.

Long term plans

Experts note that many trustees have already begun diversifying portfolios to mitigate geography and asset risk. The financial crisis remains a fresh memory for many trustees who will have taken a more robust approach to diversification in recent years.

“There’s been a general trend over the past decade of moving away from fund manager mandates that are very specific and narrow to wider mandates, such as global equities or multi-asset,” says Dan Mikulskis, head of defined benefit (DB) pensions at London-based investment consultancy Redington. “Trustees making fund manager changes will be more motivated to move to less constrained mandates.”

Yet, trustees and scheme members may need to get used to new market conditions and a longer-term, low-growth environment.

“Following Brexit, the conversations we’ve been having with investors are similar to those we’ve been having since the start of the year,” says Ana Harris, head of equity portfolio strategists for Europe, the Middle East and Africa at investment manager State Street Global Advisors.

“We haven’t seen a big shift in money or allocations, but there has been some realignment. What we are advising clients is not to be reactive to short-term volatility in the market and make sure plans for long-term investment are in place.”

“In the short term, it is likely there will be quite a lot of volatility in the market and members need to be aware of that,” says Aon Hewitt’s Ms Sharples. “One option is that everybody carries on as before with no change to strategy; however, the other option is trustees think about whether there are better ways of investing and opportunities to provide more diversification or add value.

“For people who are a bit further away from retirement, the key is what kind of returns can they expect going forward? Returns are likely to be lower than before because of pressure on the economy and lower growth expectations. To help offset this, members have the option of paying more in or retiring later, or a combination of both.”

With further details yet to emerge about what access the UK will have to EU markets and restrictions on free movement, the full impact of Brexit remains to be seen.

“Unfortunately, no one has a crystal ball. Even the best investment strategies may be adversely affected by current market volatility, but this is not to say members, trustees or fund managers should begin to panic,” says Ms McKenna of Squire Patton Boggs.

“There is little doubt that Britain leaving the EU will mean there are challenges ahead for investment funds; however, there are also opportunities for trustees to harness innovation and consider new investment portfolios.”

A greater focus on risk management has emerged as trustees attempt to mitigate some of the impact of June’s EU referendum result on pension schemes.

While attention may be focused on markets, pension scheme trustees will also have to consider a number of other risk management issues brought about by Brexit.

“I don’t think pensions should be focusing too much on whether sterling is going up or down, or whether one asset manager is performing,” says Dan Mikulskis, head of defined benefit pensions at investment consultancy Redington.

“Getting a risk management framework set up is sensible. With a simple framework to go by, there will be opportunities in a volatile market environment, but it’s always best left to the asset manager.”

Mr Mikulskis says regular reviewing of investment decisions and performance is likely to depend on the size of the scheme and the governance arrangements, adding that trustees may be put under pressure to communicate more frequently and effectively with scheme members.

Despite low interest rates, trustees should take care over possible liability hedging, while also recognising the challenges presented by a low-yield environment for bonds.

“We don’t think that just because rates are low they can’t fall further,” he says. “A lot of trustees that haven’t hedged will feel like they’ve missed the boat, but there are still risks on the down side.”
There sure are risks to the downside and trustees ignoring the bond market's ominous warning are going to regret not hedging their liabilities because if you ask me, ultra low rates and the new negative normal are here to stay, especially if the deflation tsunami I've warned of hits us.

Brexit isn't just hitting UK pensions, it's also going to hit large Canadian pensions which invested billions in UK infrastructure and commercial real estate. They were right to worry about Brexit and if they didn't hedge their currency risk, they will suffer material losses in the short-term.

However, Canada's large pensions have a very long investment horizon, so over the long run these losses can become big gains especially if Britain figures out a way to continue trading with the EU after Brexit.

That all remains to be seen. In my opinion, Brexit was Europe's Minsky moment and if they don't wake up and fix serious structural deficiencies plaguing the EU, then the future looks bleak for this fragile union.

Brexit's shock waves are also being felt in Japan where the yen keeps soaring, placing pressure on the Bank of Japan which is also grappling with expansionary fiscal policy. We'll see what it decides on Friday but investors are bracing for another letdown (I'm betting on a surprise announcement).

In other related news, while Brexit's biggest fans are in big trouble, Chris Havergal of the Times Higher Education reports, Bonuses up at USS as pension fund deficit grows by £1.8 billion:
Bonuses at the university sector’s main pension fund have soared, even though its deficit has grown by £1.8 billion.

The annual report of the Universities Superannuation Scheme says that the shortfall between its assets and the value of pensions due to members was estimated to be £10 billion at the end of March, compared with £8.2 billion last year and predating any negative effect of the Brexit vote on pensions schemes.

The health of the fund is due to be reassessed in 2017 and Bill Galvin, its chief executive, said that it was “too early” to say whether contributions from employers and employees would need to be increased.

Despite the expanding deficit, the annual report reveals that the value of bonuses paid to staff rocketed from £10.1 million to £18.2 million last year, with the vast bulk going to the scheme’s investment team.

This contributed to the number of USS employees earning more than £200,000 once salary and bonuses are combined increasing from 29 to 51 year-on-year.

Thirteen staff earned more than £500,000, up from three the year before. While the highest-paid employee in 2014-15 received between £900,000 and £950,000, last year one worker earned about £1.6 million, with another on about £1.4 million.

Mr Galvin told Times Higher Education that the increases reflected a decision to take investment activities in-house that were previously outsourced, and strong investment performance that meant that the deficit was £2.2 billion smaller than it would otherwise have been.

“Although bonuses to the investment teams have gone up, it reflects the fact they have contributed very substantially to keep the deficit from being in a worse position than it is,” Mr Galvin said. “We are delivering a very good value pension scheme, better than any other comparable schemes we have benchmarked.”

The report shows that Mr Galvin’s total remuneration, including pension contributions, increased by 12 per cent in 2015-16, from £432,000 to £484,000.

This comes after a summer of strike action by academics – many of whom will be USS members, particularly at pre-92 universities – over an offer of a 1.1 per cent pay rise for 2016-17.

The increased deficit means that the scheme’s pensions are now estimated to be only 83 per cent funded, compared with the 90 per cent figure predicted by the last revaluation in 2014.

Mr Galvin said that the assumptions made two years ago had been “reasonable”, but that asset values had not kept pace with declining interest rates.

The last revaluation led to the closure of the USS’ final salary pension scheme and an increase in contributions by employers and employees, but Mr Galvin said that a long-term assessment would be taken to determine if further changes were needed.

“Some of the things that will be relevant in the 2017 valuation have gone against [us] in terms of the assumptions we made at the last valuation,” Mr Galvin said. “That is a signal and we will consider what we should do about that…[but] it’s too early to say whether we do need to make any response or what that response might be.”

Mr Galvin added that, while an increase in liabilities since Brexit had been “broadly balanced” with an increase in the value of assets, it was “much too early” to determine the longer term impact of the UK leaving the European Union on the fund.
Looks like the Canadian pension compensation model has been adopted in the United Kingdom. That reminds me, I need to update the list of highest paid pension officers, but keep in mind Mr. Gavin is right, taking investment activities in-house saves the scheme money and it requires they pay competitive compensation to their senior investment officers.

Lastly, Elizabeth Pain of Science Magazine reports, Pan-European pension fund for scientists leaves the station:
Old age may not be something European scientists think about as they hop around the continent in search of exciting Ph.D. opportunities, broader postdoctoral experience, or attractive faculty positions. But once they approach retirement age, many realize that working in countries as diverse as Estonia, Spain, or Germany can be detrimental to one’s nest egg.

But now, there is a potential solution: a pan-European pension fund for researchers, called RESAVER, that was set up by a consortium of employers to stimulate researcher mobility. The fund was officially created on 14 July under Belgian law as a Brussels-based organization. Three founding members—the Central European University in Budapest; Elettra Sincrotrone Trieste in Basovizza, Italy; and the Central European Research Infrastructure Consortium headquartered in Trieste, Italy—will soon start making their first contributions. Researchers can also contribute part of their own salary to the fund.

“We have a solution” to preserve the pension benefits of mobile researchers, Paul Jankowitsch, who is the former chair of the RESAVER consortium and now oversees membership and promotion, said earlier this week here at the EuroScience Open Forum (ESOF). “The excuse [for institutions] to do nothing is gone.”

The European Commission has contributed €4 million to the set-up costs of RESAVER, as part of its funding program Horizon 2020. At least in principle, the fund is open to the entire European Economic Area, which includes all 28 E.U. member states except Croatia, as well as Norway, Lichtenstein, and Iceland.

Most European countries offer social security, and it's usually possible to get access to benefits even if they're accumulated in another country. But many universities and institutions also provide supplemental pension benefits that are not so easily transferred. Researchers who spend part of their career abroad—even if it's just a few hundred kilometers from home—can find themselves paying into a variety of supplemental plans, often resulting in lower benefits than they would enjoy if they just stayed put. This puts a damper on scientists' mobility.

The idea behind RESAVER is to create a common pension fund so that supplemental benefits will simply follow scientists whenever they change jobs or countries. Individual researchers can only join through their employers, which is why it’s essential for the scheme’s success that a large number of institutions around Europe join the initiative.

The big question is whether that will happen. In addition to the three early adopters, the RESAVER consortium, which was created in 2014, has some 20 members so far, together representing more than 200 institutions across Europe. That's just a tiny fraction of Europe's research landscape—and even most members of the consortium have not yet committed to joining the fund.

Take-up has been slow for a variety of reasons. According to Jankowitsch, the fund represents a long-term financial risk that many universities and research institutions are not accustomed to. Local factors further complicate matters. In France, many researchers have their pension fully covered by the state as civil servants. Although many institutions in Spain are part of the consortium, there are obstacles in Spanish law to joining a foreign pension fund. And in Germany, researchers at the Max Planck Institutes have little incentive to join because they already enjoy attractive pension packages.

Risk was also a concern for researchers in the audience at this week's ESOF session. The RESAVER pension plan will be contribution- rather than benefit-based, meaning that researchers will know how much they put in but not how much they’ll get, as they would with many other pension plans in Europe. Although the fund has been conceived as a pan-European risk-pooling investment, Jankowitsch acknowledges that there will always be risks in the capital market.

Some attendees also wondered whether, with so few institutions participating, RESAVER could actually be a barrier to mobility, at least in the short term, by limiting researchers to those institutions. Young researchers worried about inequalities because Ph.D. candidates are employed in some places but are considered students in others, making them ineligible for participation. (The consortium is currently negotiating a private pension plan for researchers who don't have an employment contract.)

The International Consortium of Research Staff Associations (ICoRSA) would like to see more transparency in the fund’s investment plan and more flexibility and guarantees for researchers, the organization says in a position statement sent to ScienceInsider today. But overall, “ICoRSA welcomes the initiative.”

Jankowitsch is optimistic: “We see a lot of questions, but not obstacles,” he said at ESOF. Institutes can benefit, because offering RESAVER to employees could give them a competitive hiring advantage, Jankowitsch said—but he encouraged researchers to urge their employers to join, if necessary. “If organizations are not joining, then this is not happening.”
This is an interesting idea but they should have modeled it after CERN's pension plan which is a defined-benefit plan that thinks like a global macro fund. CERN's former CIO, Theodore Economou is now CIO of Lombard Odier and he's a great person to discuss this initiative with.

But before they launch RESAVER to bolster the pensions of European scientists, European policymakers and UK's new leaders need to sit down and RESAVE the Euro.

Below, CNBC reports the Brexit vote will cost the UK up to $338 billion in lost merger-and-acquisition (M&A) activity by 2020 and the global economy up to $1.6 trillion, law firm Baker & McKenzie said on Monday. I'm sure Canada's large pensions are buying UK assets on the cheap.

Also, Tidjane Thiam, the chief executive of Credit Suisse, which has cut close to 2,000 jobs in London this year, told CNBC that Brexit has so far had "no impact" on its business, but that the bank is "ready to adapt" if it does.

Third, CNBC posted a clip discussing "risks & fragilities" in the global economy, with IMF Chief Economist Maurice Obstfeld. This is one of the best economists in the world and it's well worth listening to his views.

Lastly, if you haven't seen it, watch Last Week Tonight with John Oliver on Brexit. He did it before the Brexit vote and it's very funny.

I'm taking Friday off, enjoy your weekend and please remember to support this blog by subscribing or donating via PayPal on the top right-hand side. Thank you!




Wednesday, July 27, 2016

Bridgewater's Culture of Fear?

Alexandra Stevenson and Matthew Goldstein of the New York Times report, At World’s Largest Hedge Fund, Sex, Fear and Video Surveillance:
Ray Dalio, the billionaire founder of the world’s largest hedge fund, Bridgewater Associates, likes to say that one of his firm’s core operating principles is “radical transparency” when it comes to airing employee grievances and concerns.

But one employee said in a complaint earlier this year that the hedge fund was like a “cauldron of fear and intimidation.”

The employee’s complaint with the Connecticut Commission on Human Rights and Opportunities, which has not been previously reported, describes an atmosphere of constant surveillance by video and recordings of all meetings — and the presence of patrolling security guards — that silence employees who do not fit the Bridgewater mold.

Hedge funds tend to be a highly secretive bunch, yet even within their universe Bridgewater stands out. The allegations, as well as interviews with seven former employees or people who have done work for the firm and a filing by the National Labor Relations Board, open a window into the inner workings of a $154 billion company that, despite its mammoth size, remains obscure. The firm is governed by “Principles” — more than 200 of them — set out in a little white book of Mr. Dalio’s musings on life and business that some on Wall Street have likened to a religious text.

Secrecy at Bridgewater is so tight that in some units employees are required to lock up their personal cellphones each morning when they arrive at work.

In his complaint, Christopher Tarui, a 34-year-old adviser to large institutional investors in Bridgewater, contends that his male supervisor sexually harassed him for about a year by propositioning him for sex and talking about sex during work trips.

After he complained last fall, Mr. Tarui said, several Bridgewater top managers confronted him and sought to pressure him to rescind his claims. One manager, he said, accused him of lying and said that he was “blowing this whole thing out of proportion.” These and other allegations in the complaint could not be independently verified.

Mr. Tarui said he remained silent for many months about the harassment out of fear the incident would not remain private and would impede his chances for promotion at the firm, which is based in Westport, Conn. “The company’s culture ensures that I had no one I could trust to keep my experience confidential,” he said in the complaint, which was filed in January.

Jointly, Bridgewater and Mr. Tarui asked in March to withdraw the complaint from consideration by the Connecticut human rights commission. No reason was given by either party for the request, which halted the investigation. Bridgewater’s employment agreement requires employees to settle disputes through binding arbitration.

In a related action, the National Labor Relations Board recently filed a separate complaint against Bridgewater. The new complaint says that the company “has been interfering with, restraining and coercing” Mr. Tarui and other employees from exercising their rights through confidentiality agreements that all employees are required to sign when they are hired.

Both Mr. Tarui’s harassment complaint and the labor board’s filings were obtained by The New York Times through Freedom of Information Act requests.

“While it is difficult for our management team to independently judge the merits of this claim, we are confident our handling of this claim is consistent with our stated principles and the law,” Bridgewater said in an emailed statement. “We look forward to operating through a legal process that brings the truth to light.”

Mr. Tarui’s assertions about Bridgewater’s surveillance culture and its chilling effect were echoed in interviews with seven people who are former employees or who have done work for the firm. The people were not permitted to speak publicly because of the confidentiality agreements they had signed with Bridgewater.

It is routine for recordings of contentious meetings to be archived and later shown to employees as part of the company’s policy of learning from mistakes. Several former employees recalled one video that Bridgewater showed to new employees that was of a confrontation several years ago between top executives including Mr. Dalio and a woman who was a manager at the time, who breaks down crying. The video was intended to give new employees a taste of Bridgewater’s culture of openly challenging employees and putting them on the spot.

The firm no longer shows the video, the people said.

These former employees said other behavior had raised concerns within the company. At an off-site retreat in 2012 with several top executives — including Greg Jensen, Bridgewater’s co-chief investment officer — employees got drunk and went swimming naked, prompting complaints from some other employees in attendance.

Founded in 1975, Bridgewater manages billions of dollars for some of the biggest pension funds and sovereign wealth funds in the world. Its founder, Mr. Dalio, 66, is a celebrity in his own right — he has been a speaker at exclusive conferences like the World Economic Forum in Davos, Switzerland, and recently attended a White House state dinner.

Steady performance for years has led institutional investors around the world to give Bridgewater money. For a time, James B. Comey, the current director of the Federal Bureau of Investigation, was the company’s general counsel, adding to its luster.

But over the last two years, the firm has lost billions of dollars for investors as a result of mixed performances and has begun to slow its hiring. And questions have arisen about Bridgewater’s unusual culture.

Mr. Tarui has been on paid leave from the firm since Jan. 6, two days before he filed his harassment complaint. The labor relations board said in its separate complaint that Mr. Tarui was suspended after he “threatened to file a charge with the board.”

Douglas Wigdor, Mr. Tarui’s lawyer, declined to comment and said his client would not comment.

Bridgewater, in a legal filing with the labor relations board, said its employment agreements were “tailored specifically to protecting Bridgewater’s legitimate business concerns, including confidentiality interests that are unique to the financial services industry.”

A Bridgewater employee for five years, Mr. Tarui was responsible for meeting with large public pension funds. He previously worked for Pimco, the bond giant based in Newport Beach, Calif.

In his complaint, Mr. Tarui said that the sexual advances began during a business trip to Denver in May 2014, when his supervisor “caressed the small of my back” while the two men were seated on a couch in the supervisor’s hotel room. Mr. Tarui said the incident made him feel uncomfortable and he immediately left the room.

But the supervisor continued to pursue him, Mr. Tarui said in his complaint. On one occasion, he said, his supervisor confided in him that he had an “itch to scratch,” and then asked Mr. Tarui whether he had ever “thought about being with other men.” Mr. Tarui said he told his supervisor he “was not wired that way.” But his supervisor persisted, Mr. Tarui said, adding that his boss then “specifically asked whether I would consent to having a sexual experience with him.”

Mr. Tarui said he again rejected his supervisor’s advances but his supervisor continued to make overt and subtle sexual overtures well into last summer.

Mr. Tarui said in the complaint that he did not report the conduct out of fear it would become public because of the firm’s policy of videotaping confrontations between employees.

Eventually, Mr. Tarui did complain after his supervisor gave him a bad job performance rating even though he had been promoted and given a pay raise just a few months earlier. He said in the complaint that during a meeting in November 2015, he told a Bridgewater human resources representative and another top manager about the repeated sexual harassment by the supervisor.

As is the case with every meeting at Bridgewater, the meeting was recorded. So was a later meeting with several top executives at Bridgewater including David McCormick, the firm’s president. Mr. Tarui said recordings from those meetings were “widely shared” with managerial employees at Bridgewater.

The firm promised an investigation. But in his complaint Mr. Tarui said that Bridgewater’s management tried to persuade him to withdraw his allegations.

Other Bridgewater employees have complained internally about unusual antics at a corporate outing, saying that it went beyond what was acceptable behavior at a work event.

After the 2012 retreat, which was attended by more than 30 employees, several who had attended complained that they had felt uncomfortable at the excessive drinking and skinny-dipping, three former employees said. The retreat also provoked internal quarreling because several people who attended poked fun at Mr. Dalio during a campfire, these same people said.

An employee who helped arrange the retreat was later fired by Bridgewater, these people said.
The National Labor Relations Board alleges that Bridgewater “has been interfering with, restraining and coercing” employees through its strict confidentiality agreements. You can read the complaint here.

Wow! Where do I begin? I heard about this story on CNBC this morning and thought to myself:  "And the hits just keep on coming at Bridgewater."

It was just last week that I wrote a long comment on Hard Times in Hedge Fundistan where I went over Bridgewater's latest performance stating the following:
In January 2013, I openly asked whether the world's biggest hedge fund is in deep trouble, stating the following:
When I invested in Bridgewater over 13 years ago, it was just starting to garner serious institutional attention. Now, the whole world knows about Ray Dalio, Bob Prince and Bridgewater's approach. When I hear investors telling me investing in Bridgewater is a "no-brainer," I get very nervous and start thinking that the firm's success has become its worst enemy.

Let me be clear, I've met Ray Dalio, Bob Prince and many others from Bridgewater. There is no doubt they run a first-rate shop, striking the right balance, and deserve their place among the world's biggest and best hedge funds. But in this industry success is a double-edged sword and I don't like seeing hedge fund managers plastered all over news articles and engaging in silly deals.

Also, as I explained yesterday, there are good reasons to chop hedge fund fees in half, especially for these large quantitative CTAs and global macro funds. Why should Ray Dalio or anyone else managing over $100 billion get $2 billion in management fees? It's ridiculous and I think institutional investors should get together at their next ILPA meeting and have a serious discussion on fees for large hedge funds and private equity shops.

In my opinion, these large funds should charge no management fee (or negligible one of 25 basis points) and focus exclusively on performance. The "2 & 20" fee structure is fine for small, niche funds that have capacity constraints or funds just starting off and ramping up, but it's indefensible for funds managing billions as it transforms them into large, lazy asset gatherers, destroying alignment of interests with investors.

Now, one can argue that Bridgewater is becoming the next Pimco, a mega asset manager which successfully manages a lot more in assets. That's fine but then why charge 2 & 20?
Earlier this year, I criticized Bridgewater's radical transparency, stating the following:
[...] the bigger problem I have with this "radical" view of how people should interact in a company, especially a large hedge fund full of competitive individuals is on philosophical and ethical grounds. Let me explain. Ray Dalio may have mastered the machine but people aren't machines. His mechanistic/ deterministic view on markets and how the economy and world work cannot be translated into the way people should or can realistically interact with each other. 

In short, while you can code many relationships in the economy and financial markets, human interactions are far more complex. People aren't machines and when you try to impose some mechanistic deterministic view on how they should interact with each other (in order to control them?), you're bound to stifle creativity and breed contempt and an atmosphere of animosity, especially when the fund underperforms.

What else? I believe what ultimately matters is what Bridgewater employees are thinking and saying when the cameras and iPads are off or when they leave the shop. Bridgewater can tape all the meetings they want but Ray Dalio can't read minds and he doesn't know what is being said in private when employees are venting to each other or their partners at home (unless he's secretly taping them at the workplace and their homes, which is a sign of disrespect, not to mention it exhibits traits of a delusional paranoid tyrant).

Also, Gapper is right, there's an elitist (and narcissistic) air to all this. They hire a bunch of Ivy League kids and if after 18 months they manage to "get to the other side" of their emotions they then  become part of the Bridgewater "Navy SEALs," the select few who have mastered their emotions and are able to view things without their emotions getting in the way.

It's such nonsense and while it's great for marketing purposes, when the fund starts losing money, it exposes the shortcomings of this elitist mechanistic approach. Worse still, it leaves no room for real diversity at the workplace (how many people with disabilities does Bridgewater hire?) and you end up with a bunch of emotionally challenged robots at "the other end" who follow rules to conform to what their master wants, not because they truly believe or want to live by these ridiculous rules governing their every interaction.

Sure, Bridgewater is a great hedge fund, one of the best. But in my opinion, it's a victim of its success and it's gotten way too big and in order to control this explosive growth, they've implemented this 'radically transparent' cultural approach without properly thinking through what this entails or whether it stifles diversity, creativity, camaraderie and cooperation.  
As you can see, I hold nothing back when it comes to my thoughts and truth be told, I actually like Bridgewater a lot but I have zero tolerance for nonsense, especially when it comes from an elite hedge fund managing hundreds of billions of pension and sovereign wealth fund assets.
I also added this tidbit:
I agree with Jagdeep Singh Bachher, the former CIO of AIMCo who is now the CIO of the University of California regents, the management transition at Bridgewater just doesn't feel right.

Let me also publicly state this: I think Greg Jensen should leave Bridgewater to start his own global macro hedge fund and his seed investor should be none other than Ray Dalio.

This might sound odd but it will reassure investors and it will show the world that Ray Dalio isn't a power-hungry tyrant who needs to control all his employees through "radical transparency" or any other coercive means (if he had a fallout with Greg Jensen, he should send him off with the money he's owed and seed his new macro fund just like Soros did with his protege who enjoyed the biggest launch ever).

Like I said, I don't mince my words, and if you think I'm too critical of the world's biggest hedge fund, you should read the rest of this comment because unlike Bridgewater, the majority of hedge funds absolutely stink and should be shut down immediately.
After reading the latest New York Times article on Bridgewater, I now see things are a lot more serious than I thought. If you are an institutional investor of Bridgewater, you have to be asking yourself a lot of questions regarding this hedge fund's "radical" culture.

Even if you dismiss Mr. Tarui's claims (and you definitely shouldn't), were his allegations of sexual harassment properly handled internally? In my opinion, Bridgewater's senior management absolutely screwed up handling his claims. Instead of separating him from his supervisor immediately to conduct a proper internal investigation, they videotaped the meeting with top executives and shared it widely with other "managerial" employees.

Not only is this an absolutely stupid move on their part, it violates the rights of employees who may have a legitimate case of sexual harassment that needs to be dealt properly, swiftly and with absolute discretion to preserve the right of employees to work in an environment where they are not subjected to any sexual harassment whatsoever from their male or female supervisors.

Absolute discretion with a sexual harassment charge is also critical to protect the rights of a supervisor or another employee who may be wrongfully accused of a frivolous sexual harassment claim which is done out of spite and not based on facts. The last thing you want to do is record these meetings and share them with others as to bias their views in any way.

I say this because I've also seen frivolous and dubious claims of sexual harassment by employees with an axe to grind which were not based on cold, hard facts but made out of spite or some delusional misconception in their head that their boss or colleague is "in love with them and acting inappropriately".

But let me be clear about something, there should be zero tolerance for sexual or any harassment in the workplace. I don't care if it's a homosexual or heterosexual male or female boss, if they use power to obtain sexual favors, it's grounds for an immediate dismissal if the claims are legitimate.

The minute someone makes any sexual harassment claim, there has to be a process which is fair, rigorous and respects the rights of all parties involved. Frivolous sexual harassment claims can ruin someone's career but if there is cause for concern, it must be dealt swiftly and properly.

More often than not, sexual harassment in the workplace goes on until someone has the courage to step up and speak out. The resignation of Roger Ailes from Fox News is just the latest high profile case to shine the light on this hidden scourge.

Now, imagine for a second if Ray Dalio or Greg Jensen were accused of sexual harassment. Would these allegations be taken seriously internally or swept under the rug? I must admit, that offsite retreat attended by several top executives including Greg Jensen where employees got drunk and swam naked is concerning because it shows a total lack of judgment (all "good clean fun" or just plain dumb, dumb, dumb bordering on insane!). It also makes me think maybe Jensen isn't worthy of running his own macro fund because that should never have happened under his watch.

More importantly, I'm starting to believe Bridgewater's "radical transparency" is a failed experiment which is negatively impacting performance and culture at this mammoth fund.

Albert Einstein once said "insanity is doing the same thing over and over again expecting different results." I think Ray Dalio and the top executives at Bridgewater need to ask themselves some very hard questions about whether their fund is on the right track and whether there is a cultural crisis going on there. Because from where I'm standing, things are going from bad to worse.

[If Bridgewater wants to invite me to address all its employees on this and other matters in an open, critical and constructive manner, I'd be more than happy to share my no holds barred views and report on them, for a fee of course. I have better things to do with my time than spend a day or two in the woods in Connecticut to discuss Bridgewater's cultural deficiencies. Then again, why invite me when you can read my thoughts on my blog?]

Lastly, while Bridgewater is facing its internal cultural crisis, the perfect hedge fund predator, Steve Cohen, has a new mantra: better to be safe than sorry:
Cohen's Point72 Asset Management is taking extra precautions to guard against wrongdoing after Cohen's predecessor hedge fund, SAC Capital Advisors, was shut down for insider trading.

Vincent "Vinny" Tortorella, a cheery Italian-American and former federal prosecutor, is the man charged with the task, having taken over as head of Point72's compliance and surveillance unit in 2014.

Cohen has given Tortorella a blank check to do whatever it takes to keep the firm straight, including an investigative team of more than 50 staffers, including ex-federal agents who track any potential rumors of wrongdoing – both at Point72 and at competitors.

It's a proactive, rather than reactive, strategy, Tortorella told Business Insider in an interview over lunch in Manhattan. Tortorella was accompanied by two of Cohen's in-house public relations pros, also another key to his firm's makeover.

Before the insider trading investigation at Visium Asset Management became public earlier this year, for instance, Point72 put a ban on hiring those who'd recently worked there on the investment side.

Visium isn't the only firm Point72 has banned, either. Tortorella declined to say who else made the list and when exactly the Visium ban came into effect.

Point72's Visium ban contrasts with its hedge fund rivals. Ken Griffin's Citadel, for instance, recently swooped up about 17 traders from one of Visium's funds. Lombard Odier and Caxton Associates also hired Visium traders. The portfolio managers appear to have worked at Visium's global fund, a multisector equity fund that wasn't named in regulators' charges.

Reps for Citadel declined to comment, and Lombard Odier and Caxton didn't respond.

Point72 has good reason to keep strict protocol. The Securities and Exchange Commission in 2013 shut down its $16 billion predecessor, SAC Capital, banning the hedge fund from managing outside money. Cohen pleaded guilty to securities fraud and launched Point72 a year later as a family office to run his billions of wealth. A Cohen-led organization can accept outside investors' money again in 2018.

Since then, Cohen's firm has been beefing up its compliance.

"This can't ever happen again," Cohen told Tortorella when he hired him in 2014, Tortorella said.

The effort hasn't come cheap.

Cohen gave Tortorella veto powers on any potential hire, and Tortorella has used it on potential staffers who would likely have made major money for Point72. The cost of running Tortorella's team, which has grown by about 50% in the last two years, also comes to tens of millions of dollars a year, Tortorella said.

Point72's in-house surveillance team has, on occasion, fired employees who fell out of line, too. For instance, Point72 has restrictions on trading in personal accounts, and requires disclosure. Point72 fired an employee who hid a secret account.

Many in the industry scorn personal trading for the conflicts of interest that arise when traders make investments for themselves rather than for the firm.

Coincidentally, this was also an issue at Visium, where the founder, Jake Gottlieb, made a lucrative bet for himself on a trade the flagship fund also made, Business Insider reported last month. It's unclear if regulators are looking into that trade.

Other measures narrow the flow of info that Tortorella and his team have to sort through in tracking its traders. Tortorella banned instant messaging for analysts and portfolio managers, for instance. Data spying software also helps his team pick through huge flows of information.

Tortorella's team also watches how traders source their investments, such that a trader needs to back up how he or she got every piece of info leading up to a decision, Tortorella said.

Point72 isn't the first hedge fund that Tortorella has been tasked with monitoring.

He spent three and a half years at New York hedge fund Coatue Management as head of proprietary research and general counsel. Before that, he was the chief operating officer and general counsel at Guidepoint, an expert network, and a federal prosecutor in the Department of Justice's criminal division from 2004 to 2008.

The experience has given him a theory about who tends to commit insider trading.

It's not the best investors who are cheating, he said. It's those who are trying to keep their heads above water.
If you can't fight the law, use your billions to buy former federal prosecutors and give them carte blanche to enforce the laws internally.

Why is Steve Cohen doing this? Because he's gearing up to manage outside money once again and in this business, perception matters. The last thing investors want is to invest in some hedge fund manager who plays fast and loose with the law, exposing them to headline risk they can live without.

Cohen isn't stupid, he's a shark and one of the best traders in the world. He has one more shot to come back strong and manage external money and he doesn't want to screw it up because he wants to be remembered as one of the best hedge fund managers of all-time (and collect 2 & 20 on billions from public pension funds and sovereign wealth funds desperate for yield).

Interestingly, Cohen has doubled down on London after Brexit and he's betting as much as a quarter billion dollars that mechanical engineers and nuclear scientists can come up with market-beating mathematical models in their spare time:
The investment of as much as $250 million will go to a hedge fund launched by Boston investment firm Quantopian. That fund provides money to do-it-yourself traders who come up with the best computerized investing methods, giving a share of any profits to the creators.

Mr. Cohen, chief executive officer of Point72 Asset Management LP, is also making an undisclosed investment in Quantopian itself through his family-office venture arm Point72 Ventures.

The billionaire’s new commitments are part of a broader push in the money- management world to embrace quantitative investing, which relies mainly on math-based models to bet on statistical relationships or patterns in stocks, bonds options, futures or currencies.
I have a couple of people to introduce to Mr. Cohen and Quantopian. Just don't tape the meetings, let them do their work, and get out of the way and let them make you a lot richer than you already are.

The difference between Steve Cohen and many others is he's always thinking like an entrepreneur and thinking outside the box. Pension funds and sovereign wealth funds can learn a lot from his approach.

Below, CNBC reports one Bridgewater employee filed a complaint earlier this year, saying the hedge fund is like a 'cauldron of fear and intimidation.'

And CNBC's Kate Kelly reports Steve Cohen's newly-formed venture capital fund is backing algorithmic trading company Quantopian.

Lastly, I embedded a great clip on preventing sexual harassment in the workplace. It really is up to everyone to do their part in preventing any type of harassment in the workplace.

Update: On Thursday morning, Ray Dalio responded calling the New York Times article a 'distortion of reality' (added emphasis is mine):
Although we continue to be reluctant to engage with the media, we again find ourselves in the position of being left with no choice but to respond to sensationalistic and inaccurate stories, both to make clear what is true and to do our part in fighting against the growing trend of media distortion. To let such significant mischaracterizations of our business stand would be unfair to our hard-working employees and valued clients who understand the reality of our culture and values.

While we all would hope that we could count on the Times for accurate and well-documented reporting, sadly, its article "Sex, Fear, and Video Surveillance at the World's Largest Hedge Fund" doesn’t meet that standard. In this memo we will give you clear examples of the article’s distortions. We cannot comment on the specific case raised in the article due to restrictions we face as a result of ongoing legal processes and our desire to maintain the privacies of the people involved for fear that they too will be tried in the media through sensationalistic innuendos. Nonetheless, we can say that we are confident that our management handled the case consistently with the law and we look forward to its successful resolution through the legal process.

To understand the background of this story, you should know that the New York Times reporters never made a serious attempt to understand how we operate. Instead they intentionally strung together a series of misleading "facts" in ways they felt would create the most sensationalistic story. If you want to see an accurate portrayal of Bridgewater, we suggest that you read examinations of Bridgewater written by two independent organizational psychologists and a nationally-renowned management researcher. (See An Everyone Culture by Robert Kegan; Learn or Die by Edward Hess; and Originals by Adam Grant.)

Rather than being the “‘cauldron of fear and intimidation’” the New York Times portrayed us as, Bridgewater is exactly the opposite. Bridgewater is well known for giving employees the right to speak up, especially about problems, and to make sense of things for themselves. Everyone is encouraged to bring problems to the surface in whatever ways they deem to be most appropriate. To be more specific, our employees typically report their business problems and ideas in real time through a public “issue log” and a company-wide survey that is administered quarterly. More sensitive matters are reported through an anonymous “complaint line,” and all employees have access to an Employee Relations team charged with being a closed, confidential outlet outside of the management chain for handling issues of a personal nature.

The New York Times portrayed our taping of meetings as creating “an atmosphere of constant surveillance . . . that silence[s] employees who do not fit the mold.” It is well known that Bridgewater’s taping of meetings is instead done to enable employees to hear virtually all discussions happening at the firm for themselves. We make these tapes available to employees because we believe strongly that in order to have a real idea meritocracy, people need to see and hear things for themselves rather than through the spin of others. We also believe that bad things happen behind closed doors so that such transparency is healthy.

While we acknowledge that this culture of openness is not for everyone, our employees overwhelmingly treasure this way of operating. In our most recent anonymous survey, employees rated their agreement with the statement “I believe that Bridgewater’s culture and principles are key to its success” a 4.4 out of 5. Many of our employees say they wouldn't want to work anywhere else because they so appreciate our unique idea meritocracy in which meaningful work and meaningful relationships are pursued through radical truth and transparency. The New York Times article doesn’t square with common sense. If Bridgewater was really as bad as the New York Times describes, then why would anyone want to work here?

The New York Times said that some employees “are required to lock up their personal cellphones each morning when they arrive at work” which made it sound like employees can't carry their phones around with them like employees at other companies do. This is wrong. The truth is that the vast majority of our employees freely carry around their cell phones; the only place they can't is on our trading floor, where cell phones are prohibited. This policy is to protect the confidentiality of trades in order to protect our clients’ money.

The New York Times said that the company’s culture makes it impossible for employees to have matters handled confidentially. That is also wrong. As stated above, we have clearly defined channels for reporting private matters that have been utilized by many employees over the years. These matters have always been kept confidential.

The New York Times said “over the last two years, the firm has lost billions of dollars for investors as a result of mixed performance.” That is wrong as well. In 2015, our Pure Alpha fund had its 15th consecutive year of positive returns. This year, year-to-date, we have made $1.3 billion for our clients across our strategies. While that is less than expected, it is within our stated range of expectations. Notably, our clients who know us well have demonstrated their confidence in us by investing $12 billion in new assets over the last seven months.

Concerning legal matters, because Bridgewater is culturally committed to the pursuit of truth, we have always had a strong preference to not “settle” claims but rather to be judged by the appropriate legal or regulatory system, even though that is not the expedient thing to do. Like many organizations, we encounter frivolous claims made in an effort to extract financial gain. Most companies prefer to settle them because it saves time and legal costs—and avoids the sort of distorted publicity that we are now encountering. We choose to contest them instead. At the same time, we have clear policies and standards of behavior, and when we discover behavior inconsistent with them, we act decisively. We are proud to say that in our 40 year history we have had no material adverse judgments.

We are far from perfect and we like to raise our imperfections to the surface so that we can deal with them honestly and transparently, while also protecting personal privacy. This approach is controversial and gives the media a lot of material to pick from to mischaracterize, but we believe that in the long run it is the best way for improving. It has been the biggest reason for our success. We look forward to continue being judged by our employees, our clients, and the legal and regulatory parties who are responsible for overseeing our behaviors, rather than by the media.
I think it's only fair to post Ray Dalio's response to the New York Times article as he raises good points and has a right to defend his shop's unique culture and the organization he and Bridgewater employees have built into a global alpha powerhouse over many years.

Still, I have some questions regarding parts of the article that Ray didn't address (like that offsite retreat) and we shall see how this all plays out in the months ahead. If you have any comments, you can reach me at LKolivakis@gmail.com.



Tuesday, July 26, 2016

CalSTRS Gains 1.4% in Fiscal 2015-16

Timothy W. Martin of the Wall Street Journal reports, Giant California Teachers Pension, Calstrs, Posts Worst Result Since 2008 Crisis:
The nation’s second-largest public pension posted its slimmest returns since the 2008-2009 financial crisis because of heavy losses in stocks.

The California State Teachers’ Retirement System, or Calstrs, earned 1.4% for the fiscal year ended June 30, according to a Tuesday news release. The result is the lowest since a 25% loss in fiscal 2009 and well below Calstrs’ long-term investment target of 7.5%. Calstrs oversees retirement benefits for 896,000 teachers.

The soft returns by Calstrs, which manages $189 billion, foreshadow tough times for other U.S. pension plans as they grapple with mounting retirement obligations and years of low interest rates. On Monday the largest U.S. pension, the California Public Employees’ Retirement System, said it earned 0.6% on its investments. Other large plans are posting returns in the low single-digits.

Calstrs did report big gains in real estate and fixed income. But its holdings of U.S. and global stocks—which represent more than half of its assets—declined by 2.3%.

The fund earned 2.9% on its private-equity investments, falling short of its internal benchmark by 1.7 percentage points. Real estate rose 11.1% but lagged behind the internal target.

Calstrs investment chief Christopher Ailman said the fund’s portfolio “is designed for the long haul and “we look at performance in terms of decades, not years.”

Over the past five years, Calstrs has posted returns of 7.7%. But the gain drops to 5.6% over 10 years and 7.1% over 20 years.
John Gittelsohn of Bloomberg also reports, Calstrs Investments Gain 1.4% as Pension Fund Misses Goal:
The California State Teachers’ Retirement System, the second-largest U.S. public pension fund, earned 1.4 percent in the 12 months through June, missing its return target for the second straight year.

Calstrs seeks to earn 7.5 percent on average over time to avoid falling further behind in its obligations to 896,000 current and retired teachers and their families. The fund, which had $188.7 billion in assets as of June 30, averaged returns of 7.8 percent over the last three years, 7.7 percent over five years, 5.6 percent over 10 years and 7 percent over 20 years.

“The Calstrs portfolio is designed for the long haul,” Chief Investment Officer Christopher Ailman said Tuesday in a statement. “We look at performance in terms of decades, not years. The decade of the 2010s has so far been a good performer, averaging 10.3 percent net.”

U.S. pension funds have struggled to meet investing goals amid stock volatility, shrinking bond returns and slowing emerging-market growth at a time when retirees are living longer and health-care costs are rising. Long-term unfunded liabilities may ultimately need to be closed by higher employee withholding rates, reduced benefits or bigger taxpayer contributions.

The California Public Employees’ Retirement System, the nation’s largest pension fund with $302 billion in assets, earned 0.6 percent for the latest fiscal year, according to figures released Monday. Calpers trails its assumed annualized 7.5 percent rate of return for the past three-, five-, 10-, 15- and 20-year periods.

Calstrs and Calpers are bellwethers for public pension funds because of their size and investment approach. Both have pressured money managers to reduce fees while also using their influence as shareholders to lobby for environmental, social and corporate-governance reforms.

Calstrs returned 4.8 percent in the previous fiscal year after gaining 19 percent in 2014. Over the last decade, the teacher system’s returns ranged from a 23 percent gain in 2011 to a 25 percent loss in 2009.
Asset Allocation

The fund’s investments in stocks fell 2.3 percent last year, while fixed income and real estate both rose 11 percent and private equity increased 2.9 percent. As of June 30, Calstrs had about 55 percent of its assets in global stocks, 17 percent in fixed-income, 14 percent in real estate, 8.7 percent in private equity with the balance in cash and other financial instruments.

While Calstrs outperformed its benchmark index for equities by 0.2 percent last year, its returns trailed in every other category.

Since 2014, Calstrs’s unfunded liability has grown an estimated 27 percent to $69.2 billion while Calpers’s gap has increased 59 percent to $149 billion, according to Joe Nation, a professor of the practice of public policy at Stanford University. Both retirement systems’ assumptions of 7.5 percent returns are based on wishful thinking, he said.

“The assumption is we’re going to have a period like the 1990s again,” Nation said. “And there are very few people who believe that you’ll get the equity returns over the next five or 10 years that we saw in the 1990s.”
Of course, professor Nation is right, CalPERS, CalSTRS and pretty much all other delusional US public pensions clinging to some pension-rate-of-return fantasy are going to have to lower their investment assumptions going forward. The same goes for all pensions.

In fact, as I write my comment, Krishen Rangasamy, senior economist at the National Bank of Canada sent me his Hot Chart on US long-term inflation expectations (click on image):

While U.S. financial conditions and economic data have improved lately with consensus-topping June figures for employment, industrial output and retail spending, that’s not to say the Fed is ready to resume rate hikes. Brexit has raised downside risks to global economic growth and the FOMC will appreciate the potential spillover effects to the U.S. economy. But perhaps more concerning to the Fed is that its persistent failures to hit its inflation target ─ for four consecutive years now, the annual core PCE deflator has been stuck well below the Fed’s 2% target ─ is starting to disanchor inflation expectations
As today’s Hot Charts show, both survey-based and market-based measures are showing sharp declines in inflation expectations. The University of Michigan survey even shows the lowest ever quarterly average for long-term inflation expectations. So, while markets are now pricing in a decent probability of a Fed interest rate hike later this year, we remain of the view that the FOMC should refrain from tightening monetary policy until at least 2017.
I agree, the Fed would be nuts to raise rates as long as global deflation remains the chief threat but some think it needs to raise rates a bit in case it needs to lower them again in the future (either way, I remain long the USD in the second half of the year).

The point I'm trying to make is with US inflation expectations falling and the 10-year Treasury note yield hovering around 1.58%, all pensions will be lucky to return 5% annualized over the next ten years, never mind 7.5%, that is a pipe dream unless of course they crank up the risk exposing their funds to significant downside risks.

Taking more risk when your unfunded liabilities are growing by 27 percent (CalSTRS) or 59 percent (CalPERS) is not a given because if markets crash, those unfunded liabilities will soar past the point of no return (think Illinois Teachers pensions).

Anyways, let's get back to covering CalSTRS's fiscal year results. CalSTRS put out a press release announcing its fiscal 2015-16 results:
The California State Teachers’ Retirement System remains on track for full funding by the year 2046 after announcing today that it ended the 2015-16 fiscal year on June 30, 2016 with a 1.4 percent net return. The three-year net return is 7.8 percent, and over five years, 7.7 percent net.

The overall health and stability of the fund depends on maintaining adequate contributions and achieving long-term investment goals. The CalSTRS funding plan, which was put in place in June 2014 with the passage of Assembly Bill 1469 (Bonta), remains on track to fully fund the system by 2046.

CalSTRS investment returns for the 2015-16 fiscal year came in at 1.4 percent net of fees. However, the three-and-five year performance for the defined benefit fund still surpass the 7.5 percent average return required to reach its funding goals over the next 30 years. Volatility in the equity markets and the recent June 23 U.K. referendum to exit the European Union, also known as Brexit, left CalSTRS’ $188.7 billion fund about where it started the fiscal year in July 2015.

“We expect the contribution rates enacted in AB 1469 and our long-term investment performance to keep us on course for full funding,” said CalSTRS Chief Executive Officer Jack Ehnes. “We review the fund’s progress every year through the valuation and make necessary adjustments along the way. Every five years we’ll report our progress to the Legislature, a transparency feature valuable for any such plan.”

The 2015-16 fiscal year’s investment portfolio performance marks the second consecutive year of returns below the actuarially assumed 7.5 percent. Nonetheless, CalSTRS reinforces that it is long-term performance which will make the most significant impact on the system’s funding, not short-term peaks and valleys.

CalSTRS continues to underscore and emphasize the long-term nature of pension funding as it pertains to investment performance and the need to look beyond the immediate impacts of any single year’s returns. And although meeting investment assumptions is very important to the overall funding picture, it is just one factor in keeping the plan on track. Factors such as member earnings and longevity also play important roles.

“Single-year performance and short-term shocks, such as Brexit, may catch headlines but the CalSTRS portfolio is designed for the long haul. We look at performance in terms of decades, not years,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “The decade of the 2010s has so far been a good performer, averaging 10.3 percent net.”

CalSTRS’ net returns reflect the following longer-term performance:
  • 7.8 percent over three years
  • 7.7 percent over five years
  • 5.6 percent over 10 years
  • 7.1 percent over 20 years
Fiscal Year 2015–16 Returns (Net of Fees) and Performance by Asset Class (click on image):


As of June 30, 2016, the CalSTRS investment portfolio holdings were 54.8 percent in U.S. and non-U.S. stocks, or global equity; 16.9 percent in fixed income; 8.7 percent in private equity; 13.9 percent in real estate; 2.8 percent in inflation sensitive and absolute return assets; and 2.9 percent in cash.

About CalSTRS

The California State Teachers’ Retirement System, with a portfolio valued at $188.7 billion as of June 30, 2016, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 896,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts.
A few brief remarks on the results below:
  • Just like CalPERS and other large public pensions with a large asset allocation to global equities, CalSTRS has a lot of beta in its portfolio. This means when global stocks take a beating or slump, their Fund will underperform pensions with less beta in their portfolio (like CPPIB, PSP, Ontario Teachers, etc.). Conversely, when global stocks soar, they will outperform these pensions. But when stocks get hit, all pensions suffer in terms of performance (some a lot more than others).
  • Also similar to CalPERS, Private Equity had meager returns of 2.9%, underperforming its benchmark which returned 4.6%. CalPERS's PE portfolio returned less (1.7%) but outperformed its benchmark by 253 basis points which signals "benchmark gaming" to me. You should all read Yves Smith's comment, CalPERS Reported That It Made Less in Private Equity Than Its General Partners Did (Updated: As Did CalSTRS), to get more background and understand the key differences. One thing is for sure, my comment earlier in November 2015 on a bad omen for private equity was timely and warned all you the good days for PE are over.
  • CalSTRS's performance in Real Estate (11.1%) significantly outperformed that of CalPERS (7.1%) but it under-performed its benchmark which returned 12.6%. Note that CalPERS  realized losses on the final disposition of legacy assets in the Opportunistic program which explains this relative underperformance. 
  • More interesting, however, is how both CalPERS and CalSTRS use a real estate benchmark which reflects the opportunity cost, illiquidity and risk of the underlying investments. I'm mentioning this because private market assets at CalPERS and CalSTRS are valued as of the end of March, just like PSP and CPPIB. But you'll recall I questioned the benchmark PSP uses to value its RE portfolio when I went over its fiscal 2016 results and this just makes my point. Again, this doesn't take away from PSP's outstanding results in Real Estate (14.4%) as they beat the RE benchmark CalPERS and CalSTRS use, just not by such a wide margin
  • Fixed Income returned less at CalSTRS (5.7%) than at CalPERS (9.3%) but it uses a custom benchmark which is different from that of the latter. Still, with 17% allocated to Fixed Income, bonds helped CalSTRS buffer the hit from global equities.
  • Inflation Sensitive Assets returned 4.2% but CalSTRS doesn't break it down to Infrastructure, Natural Resources, etc. so I can't compare it to CalPERS's results.
  • Absolute Return returned a pitiful 0.2%, underperforming its benchmark by 100 basis points (that benchmark is low; should be T-bills + 500 or 300 basis points). Ed Mendell wrote a comment, As CalPERS Exits Hedge Funds, CalSTRS Adds More, explaining some of the differences in their approach on hedge funds. CalSTRS basically just started investing in large global macro and quant funds and squeezes them hard on fees. The party in Hedge Fundistan is definitely over and while many investors are running for the exits, most stay loyal to them, paying outrageous fees for mediocre returns.
These points pretty much cover my thoughts on CalSTRS's fiscal 2015-16 results. As always, you need to dig beneath the surface to understand results especially when comparing them to other pension funds.

You can read more CalSTRS press releases here including one that covers research from University of California, Berkeley which shows that for the vast majority of teachers, the California State Teachers’ Retirement System Defined Benefit pension provides a higher, more secure retirement income compared to a 401(k)-style plan. (I don't need convincing of that but they need to significantly improve the funded status to make these pensions sustainable over the long run).

Below, a CNBC discussion on the Brexit vote impact on investments and retirement funds with Christopher Ailman, California State Teachers Retirement System (CalSTRS) CIO.

Ailman said he's worried about the UK and Europe and he's right. The Brexit vote was Europe's Minsky moment and while short-term, everything seems fine, longer-term, things are less clear, especially if global deflation sets in. If that happens, all pensions will need to lower their investment assumptions quite significantly.

Monday, July 25, 2016

Beware of a Bull Trap?

Chuck Jaffe of MarketWatch reports, Technical analyst: Is this bull market just a bull trap?:
Leo Leydon of Financial Focus Advisory Services in Pembroke, Mass., says the market’s run of good days to record highs could be a “bull trap” that sees latecomers gored when the market takes a step back.

In an interview on “MoneyLife with Chuck Jaffe,” a MarketWatch senior columnist, Leydon expressed concern that much of the current rally has been fueled by the U.K’s Brexit vote to leave the European Union. That flow of funds leaving the British pound for the safer haven of the dollar could reverse itself quickly.

Leydon, a technical analyst who early this year forecast the market’s rebound from a horrible start, noted that the action has the potential to set up a whipsaw.

“[The market] pulled back and broke short-term support — and did it in an ugly fashion — and then flipped it and went positive and broke through the top of resistance,” he explained. “But before I make a major change, I want to see some conviction in the underlying stocks.”

Leydon noted that the market highs have been accompanied by a change in leadership, with stocks that had been lagging now looking much stronger. Still, he lamented that the results reported by companies like Microsoft Corp (MSFT) “are not good, just better than expected.”

If the market can’t develop the broad support to stay at its new highs, Leydon said he fears a bull trap, which is when the market breaks out, fails to hold the new levels “and slams back down to the bottom of the channel.”

That potential — despite liking the market’s rally overall — has Leydon on hold.

“I’m the confident technical analyst who says ‘Wait a minute, things may be changing,’” he said. “So what do you do when things may be changing? Don’t make any dramatic decisions.”

You can listen to the interview at www.moneylifeshow.com.
Michael Taylor, a former Goldman Sachs bond salesman who now writes the finance blog Bankers-Anonymous.com, also wrote an interesting column for The San Antonio Express, Why the record-high stock market may be bad for investors:
It’s silly season in stock market news again. By that I mean the regular “stock market reaches new highs, hooray!” headlines and commentary.

I’ll start by unpacking some reasons why this is silly news and how you can be a much more sophisticated reader of financial news. I admit upfront that you’ll risk being a bore at cocktail parties if you repeat my commentary when people want to discuss how “the market” is doing. Sorry. (Not sorry.) But still, I want you to know these things and feel quietly smug.

I conclude this column with an argument for why a rising stock market overall probably isn’t even good financial news for me, or many of you, if you’re not yet retired.

But first, there’s our bad habit of noting point changes and absolute levels in stock market index values, as if the market index matters much.

In my first year in bond sales in the late 1990s, I used to call each morning upon a junior trader — a Venezuelan named Luisa who worked at the smallest customer of my desk — to give market commentary. I remember the morning I breathlessly mentioned a dramatic move in the Dow, like a 100-point drop. Luisa dryly noted that she didn’t pay much attention to point movements, but rather percent changes in the market.

Ugh, my ears burned with shame. They still do.

Mathematically, she was right. A 100-point drop means a lot if the index value is 2,000 — a 5 percent move! — but very little if the index is 10,000 — a 1 percent move. Meh.

We should all be like Luisa and only pay attention to percent changes, not point moves.

Similarly, noting that numerically pleasing round numbers like Dow 10,000 or Dow 18,000 have been breached for the first time is the financial equivalent of noting that Mercury is in retrograde while Neptune’s tilt should lead us to tread cautiously with emotional matters this week. People do pay attention to these things, but they really shouldn’t. It’s utterly meaningless.

Next, there’s the problem of talking about moves in “the market” when we’re describing just a small sliver of companies.

“The market” as typically described in financial media is the Dow Jones industrial average — a 120-year-old marketing tool of the company that used to own the Wall Street Journal — comprising just 30 large companies in a variety of industries. These are important companies, but a very skewed snapshot of stock market performance.

Even the more-representative S&P 500 Index — another widely used proxy for “the market” — still describes only what 500 large companies in the U.S. have done, excluding an additional 5,000 or so reasonably big companies in this country, not to mention the thousands more located in other countries.

Next, we have the topic of dividends, which account for a significant portion of stock market gains for long-term investors. The dividend yield for S&P 500 stocks — aka how much cash you get paid to just hold the stuff year in and year out — is about 1.9 percent in 2016 and has ranged from 1 percent to 4 percent in recent decades. That means much of the long-term return from investing in stocks happens regardless of whether the prices for stocks even go up or down.

With a 1.9 percent dividend yield, the stock market indexes could flat-line for many years, and you’d still make more current income than you would invested in U.S. Treasury bonds. By this point, I just mean to emphasize that the index’s going up is not the key to making money in stocks in the long run. Which sort of brings me to my final point.

I don’t mean to be a complete Grinch. (Yes I do.) It seems like it should be better for existing stock investors if the market indexes reach new highs rather than new lows, right?

But when I think about it, that’s not quite right either.

I personally should not celebrate high stock prices. It kind of makes the most sense depending on your age and where you are in your investing life.

Celebrating high stock market prices only makes sense if I’m a seller of stocks, not a buyer. I bought my first stock at age 24. I figure I’ll want to still accumulate more through maybe age 64. Right now, at age 44, I’m right at the hump of my investing life, my midpoint. If I have a chance to accumulate stocks over the next 20 years, shouldn’t I prefer prices to stay low rather than high?

Taking this thought process to the extreme, shouldn’t I prefer a completely flat-lined stock market for the first 39 years of my 40-year investing life, then some kind of rocket-ship price jump, in which the market zooms up by 6,188 percent in the final year, when I’m getting ready to sell in retirement? (FYI, 6,188 percent is the cumulative returns of the S&P 500, including dividends reinvested, over the previous 40 years, from July 1976 to July 2016. Or 10.9 percent annual return, if you prefer.) I recommend verifying this for yourself with an online S&P calculator for any time period.

Meanwhile, the upward climb in prices we celebrate in financial news really isn’t helpful for me, as I accumulate stock at higher and higher prices.

This rising stock market index news is both misleading and not something to particularly celebrate, for most of us.
Bond people have a way to look at things the way most investors don't. They focus on the cold hard facts and don't get carried away by the exuberance of the yipee stock market.

This is why I take the bond market's ominous warning so seriously, it reflects the reality out there that despite the record-setting US stock market, the future is bleak and anemic growth, disinflation and possibly deflation are in the cards.

It also means ultra low rates and the new negative normal are here to stay and investors need to readjust their expectations to prepare for lower and volatile returns ahead (read my comment on CalPERS smearing lipstick on a pig).

The other reason why I like this article is because it demonstrates why a pension system built around 401(k)s, RRSPs or defined-contribution plans is doomed to fail, exposing millions to pension poverty. It's all a matter of luck because even if they invest wisely and stick to a disciplined process, if they have the misfortune of retiring during a bad bear market, they're pretty much screwed and risk outliving their savings.

This is why I firmly believe that a solid pension system is built around large, well-governed defined-benefit plans like we have here in Canada (read my comment on the big CPP clash).

Now, when it comes to the stock market, everyone has an opinion. Some fear we are entering a Cold War-style stock market while others think the economic data is improving (at least that's what Dr. copper is signalling) and the bullish case for global stocks is under-appreciated.

Nobody really knows where the stock market is headed but even FundStrat's Tom Lee, a well-known permabull, is telling his clients it may make sense to fade strength and be prepared to add to weakness in August.

As Zero Hedge points out, to make his case, Lee shows how equity risk is trading below bond risk for the first time since right before markets crashed in August 2015 (click on image):
S&P 500 implied volatility (VIX) has now been lower than Treasury ETF TLT's implied volatility for the month of July (since Brexit)...


As FundStrat's Tom Lee points out in a recent reports, gaps as wide as the current one were followed 68% of the time by S&P 500 Index declines in the next 20 trading days, according to his data... and is clear from above, the last time stocks got this 'relatively' complacent, things went south very fast.
Zero Hedge being Zero Hedge also thinks Verizon just signaled the top of the market:
The last time AOL (bought by Verizon in May 2015) was involved in a mega merger was January 2000, when AOL acquired Time Warner for $182 billion in what was the mega deal of the last tech bubble, creating a $350 billion behemoth... which nearly dragged down both companies a few years later. The timing could not have been more perfect as it marked the tech bubble top...

Will it happen again? (click on image)

Will it happen again? As I've written, I don't see a summer crash but that doesn't mean stocks can't pull back from these levels.

On Friday, Needham Growth Fund Portfolio Manager Chris Retzler said even though markets have recovered nicely following Britain's vote to leave the European Union, investors should be prepared for a pullback.

This isn't necessarily a bad thing. Bloomberg posted an interesting comment stating buying the biggest stock market dips in 2016 returned three times the S&P's YTD returns.

Of course, buying the dips in deeply oversold stocks works well when central banks are pumping massive liquidity in the global financial system and algorithmic, high-frequency traders are having fun buying and selling momentum stocks.

But buying the dips isn't fun when markets are crashing hard and there's nowhere to hide. I vividly remember a phone conversation with Bob Bertram, a former CIO of Ontario Teachers, back in 2008 when he was telling me how he tried buying a few dips but "the market kept going lower and that was a very scary feeling" (trading ultra high beta biotech shares, I know exactly what he meant, when it works out, you're making a killing, but when it goes against you, it really stings a lot!).

When I trade markets, I'm always asking myself the same questions: Are central banks pumping liquidity into the system? Where are rates heading? How is the US economy relative to the global economy? Will the US dollar rise or fall over the next six months? What about the yen and euro? Is China getting ready to devalue again? And most importantly, is global deflation still alive and well and if so, which sectors do I want to trade?

When people ask me what is the best way to become a good investor, I tell them you have to read a lot and learn through your mistakes. The same goes with trading, some like buying the dips, others prefer buying breakouts, but unless you've had your head handed to you a few times, you will never learn how to trade properly no matter what 'disciplined' system you're using.

These markets are brutal. They may seem easy as stocks keep posting record highs, but trust me, they are brutal and that's why some of the best hedge funds in the world are struggling. Anyone who tells you these are easy markets is either a flat out liar or a complete and utter fool who is one crash away from getting his or her head handed to them.

But as my good friend Frederic Lecoq always reminds me: "When are markets ever easy?" He's absolutely right, if markets were easy, everyone would be stinking rich buying the dips or buying the breakouts and holding on for the big gains.

Having said this, there are always opportunities in the stock market and I'm seeing it now in individual names like Advanced Micro Devices (AMD), Big Lots (BIG), Dollar General (DG), Dollar tree (DLTR), eBay (EBAY), Sprint (S), Texas Instruments (TXN) and many others making 52-week highs.

The problem is picking the right stocks and even the experts are struggling. As the Financial Times reports, active managers are actively failing:
To an audience of financial advisers who had come to hear the hottest stock tips from the big stars of the fund management industry, it was a startling thing to say: “If somebody asked me to make the argument for active management, I would find it difficult given the statistics.”

The speaker, Dennis Lynch, is stockpicking royalty. The son of the founder of Lynch & Mayer, a pioneering money manager from the 1970s, has his own $3.4bn mutual fund — the Morgan Stanley Institutional Growth fund — which has put money into the likes of Twitter, Netflix and Tesla. It has outperformed the S&P 500 by more than 2 percentage points annually for the past decade, putting him in the top 6 per cent of his peers and accumulating substantial extra profits for his investors.
But active managers, those whose funds must try to beat the market rather than simply track the index, are facing something approaching a crisis.

A majority fail to beat the index over any significant period, and most of those that do ultimately find their outperformance to be fleeting. New competitors are claiming any insight they actually possess can be replicated by a computer. Clients are shifting en masse to index-based funds — active funds have lost $213bn in assets in the year to the end of May, Morningstar says, while passive funds took in $240bn. Profit margins, traditionally among the best in the finance world, are under threat and it seems only a matter of time before there is pressure on managers’ pay. Sporadic lay-offs at some money managers this year may be a harbinger of more to come, say consultants, especially if a newfound willingness to discuss mergers triggers a wave of cost-cutting deals.

The panel at the Morningstar Investment Conference, held in Chicago last month, was titled “Ultimate Stockpickers”, but it began with a challenge to participants to, in effect, justify their existence. Mr Lynch said that perhaps only 15 per cent of active managers are persistent market-beaters.

“The managers that tend to outperform have certain characteristics in common,” he said. “They tend to be longer term in nature, not traders. They are willing to be different to the benchmark. Most importantly, they also tend to have a lot of skin in the game.”
The bulk of active managers are not justifying their fees, especially in emerging markets, and things are about to get a whole lot tougher for them. Standard & Poors thinks passive fund fees could hit zero and Moody's thinks active management will shrink substantially as passives popularity grows.

On that note, let me wrap things up because this comment is long and I'm getting tired.

Below, markets have recovered nicely following Britain's vote to leave the European Union, but investors should be prepared for a potential wave of selling, Needham Growth Fund Portfolio Manager Chris Retzler said Friday.

Second, Jeroen Blokland, a widely followed money manager, finds stocks in the US are too pricey based on a chart comparing the level of the market to the amount of sales generated by the companies within the S&P 500.

Third, J.P. Morgan Private Bank’s Stephen Parker takes a look at what’s been driving the market rally, including the current trend for “safe haven” assets and interest rates.

Fourth, Tom McClellan of the McClellan Market Report discusses the 14-day choppiness index and what it could mean for the market going forward with Dominic Chu.

Fifth, in a recent interview with CNBC's "Fast Money," Cornerstone Macro's Carter Worth described the current chart of crude oil as a "perfect match" to that of the turbulent 2008-2009 period. That leads him to believe the commodity could continue to come under pressure.

"I think we're going lower, and crude looks to my eyes like it's heading back to $40," said Worth. Given my views on the US dollar for the second half of the year, I agree and continue to recommend steering clear of oil (USO), gold (GLD), silver (SLV),  metal and mining (XME), energy (XLE) and emerging markets (EEM).

Lastly, Les Funtleyder, E Squared asset management, and Michael Yee, RBC biotech analyst, discuss trading health care and the future of biotech during the election and CNBC's "Fast Time Halftime Report" traders discuss whether or not its worth buying the biotech bounce.

For many reasons, biotech (IBB and XBI) remains my favorite sector going forward and I bought the big dips on a few smaller biotechs that got clobbered earlier this year and are now coming back strong. The US presidential election didn't factor into my decision. If there's a bull trap, it's not here.