Wednesday, September 19, 2018

Caisse Chief Sounds Alarm on Climate?

Michael Tutton of the Canadian Press reports, Time to see climate change mitigation as an economic opportunity, Caisse chief says:
One of Canada’s largest pension fund managers says trillions of dollars should be shifted into investments that will counter global warming, in part because it’s crucial to long-term profits.

Michael Sabia, chief executive of the Caisse de Dépôt et Placements, spoke Tuesday at a roundtable discussion on sustainable finance on the eve of a three-day meeting of G7 environment, oceans and energy ministers in Halifax.

The G7 ministers will be discussing climate change, plastics pollution, illegal fishing and clean energy at the meeting.

Sabia said government action is urgently needed, but he also urged capitalists to stop seeing climate change solely as a risk, and to “get on with” seeking profits from the need for more renewable energy, low-energy real estate and low-carbon transport systems.

“Climate change and responding to climate change is an important investment opportunity. It’s a profitable investment opportunity,” said the executive.

The pension fund manager told the gathering of business people, civil servants and non-governmental experts that about $45 trillion in long-term investments handled by institutional pension funds should move more quickly to areas such as clean-energy, low-energy buildings and low-carbon transport systems.

As Sabia began speaking, he reviewed the past summer’s evidence of the impact of climate change.

“We see its impact every day. Heat waves and drought in Europe. This summer record temperatures of 33 degrees Celsius north of the Arctic Circle. ... Deadly hurricanes, floods, wildfires that were the largest in the history of the State of California,” said the executive.

Some business leaders are starting to factor in climate change to their investment and planning decisions, but the pace needs to accelerate, he said.

“Some of that is happening across funds around the world. But my point is: not nearly enough,” he told the gathering in his opening presentation.

“Why is that? Because too many investors, even long-term oriented investors, still see climate change as a constraint, as something that forces them to make a choice, to compromise their returns.”

The executive with Canada’s second largest pension fund manager — which handles $308 billion in net assets — said more investors must shift away from this way of thinking.

“Climate change ... is not a constraint. It’s an opportunity to do two things: to contribute positively to the transition to a lower carbon economy and at the same time ... to generate the returns we need to be good stewards of people’s savings.”

The Caisse announced last year it plans to reduce the carbon footprint of its overall portfolio by 25 per cent by the year 2025.

Sabia said it’s working out well.

“There’s growth everywhere as a result of the beginnings of a reaction to the threat of climate change ... the energy sector is one example,” said Sabia.

“At least 50,000 megawatts of new wind power is being installed annually ... that’s equivalent to the utility ... of Hydro Quebec.”

He cited his pension fund’s investments in solar and wind energy, along with low-energy real estate projects, as producing strong returns, mentioning its investment in the fast-growing Azure Power, a solar producer in India.

Economist and climate expert Nicholas Stern, a teacher at the London School of Economics, also spoke at the opening panel, backing Sabia’s argument that environmental policies are good for job creation and the economy.

“Finance ministers are interested in productivity, investment, innovation, growth and revenue. It’s all here in the transition to the zero carbon economy,” he said.

“There is no long-run growth that is high carbon (emissions). It self-destructs.”

The economic researcher said the world’s infrastructure is projected to double in 15 years while carbon emissions must fall 30 per cent to hold temperature increases to safe levels.

“Those two numbers tell us we must do something radically different, and ... we have to do it fast,” he said.

Meanwhile, he said the alternative of preserving ecosystems, creating more public transit, and building solar energy, are all part of a positive story for the economy and for humanity.

“This is an inclusive growth story and it’s very attractive ... moreover we know how to do it. At least we know how to start strongly and we’re going to learn like mad.”

The meeting of G7 ministers starts on Wednesday with a gathering of G7 environment ministers.

Catherine McKenna, Canada’s federal minister of the environment, has said she will be talking about the rules around the Paris climate agreement.

She’s also promoting a non-binding ocean plastics charter, which five of the seven G7 nation leaders signed at the Charlevoix summit with the goal of reducing plastic waste in the world’s oceans.

McKenna told The Canadian Press in an interview that she plans to bring the charter to the United Nations next week as well during a trip to New York.

A spokeswoman for her department said the charter will be raised in talks with various nations outside of formal proceedings of the United Nations General Assembly.
Carl Meyer of Canada's National Observer also reports, Too many investors still see climate action as anti-profit, says Quebec pension fund boss:
Too many investors are still seeing climate action as a restraint on profit, the president of one of Canada’s biggest pension plans told a room full of foreign government officials and private sector leaders Tuesday.

Michael Sabia, the president of Caisse de dépôt et placement du Québec, which manages $300 billion in assets, made the remarks at the opening of a meeting on the “new climate economy,” organized on the edges of the G7 environment ministerial in Halifax.

“Too many investors, even long-term oriented investors today, still see climate change as a constraint — something that forces them to make a choice, to compromise their returns, and therefore runs counter to their fiduciary obligations to their clients,” said Sabia.

“As long-term investors, collectively, we need to think differently, because addressing climate change is not only about what you stop doing — more importantly, it’s about what you start doing.”

Sabia didn’t name specific investors or governments at the meeting in a hotel conference room, but spoke about the trillions of dollars in economic gains that studies have shown will be available to nations that shift to a low-carbon economy.

Reporters were permitted to hear opening remarks from some speakers before they were ushered from the room.

Nicholas Stern, chair of the U.K.-based Grantham Research Institute on Climate Change and the Environment,was expected to prepare a briefing on the rest of the closed-door meeting for the environment ministers from the Group of Seven nations meeting on Wednesday.

The pension plan was among Canadian companies listed as some of the top investors in new coal power plants overseas, according to a December 2017 report by Friends of the Earth Canada and Germany's Urgewald. The federal government has been pushing to phase-out coal power worldwide.

Asked by National Observer after the meeting whether the group had discussed investments in coal power, Marc-André Blanchard, Canada’s ambassador to the United Nations, said “we discussed infrastructure in a very wide sense.”

“We discussed the necessity to build resilient infrastructure, low-carbon infrastructure, the fact that there are many opportunities in renewable energy," he said.

In June, La Caisse and Ontario Teachers' Pension Plan announced a partnership with the Canadian government and several financial services companies in G7 countries to come up with a unified approach to disclose climate-related risks, among other objectives.

The pension plan also produced a climate change strategy in 2017, committing to a 25 per cent decrease in carbon pollution per dollar invested by 2025, a 50 per cent increase in “low-carbon investments” by 2020 and to “factor climate change into all our investment activities and decisions.”

Three federal Canadian ministers will co-host their counterparts from France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union, this week for meetings on energy, oceans and fisheries, plastics and marine waste, and a just transition for workers in the fossil fuel industry.

Climate becoming ‘people’s issue’ says Caisse boss

Sabia has worked at high levels in both government and business, as a deputy secretary in the Privy Council Office and as president of Bell Canada International and chief financial officer at Canadian National Railway. He also said the pension plan has noticed that consumer attitudes and buying patterns are now changing.

“Climate change is becoming a popular issue, a people’s issue. We see this frequently — we see it in the companies we invest in,” he said. “How? Because their growing concern is to ensure that their brands are seen by the public to be on the right side of this defining issue.”

He said across industries as diverse as real estate, agriculture, transportation and electronics, there has been progress on reducing emissions, “but frankly, not enough.”

As an example of the scope he envisions, he said at least 50,000 megawatts of new wind power is being installed annually, the same as produced in a year by Hydro Quebec, which he said was the fourth-largest hydro producer in the world. Meanwhile, solar power’s price is five times lower than a decade ago, and in several countries, such as India and China, solar is cheaper than coal and gas plants.

Sabia also took aim at governments, although not naming any, noting that while some have introduced carbon pricing and reformed their tax code to address climate change, “obviously, in other countries, governments are going to need to demonstrate greater leadership on this issue.”

And he noted the urgency of climate change, compounded by “growing economic pressure on the middle class and the related issues of the rise of populism and trade protectionism around the world.”

“Climate change is real; it’s gone beyond the point of being a risk,” said Sabia.

“We see its impact every day — heat waves and drought in Europe this summer; record temperatures; 33 degrees Celsius north of the Arctic circle in Finland...in North America, pretty extreme weather events, deadly hurricanes, floods, wildfires.”

‘Governments alone cannot do it’: Canadian envoy

Blanchard, Canada’s ambassador, also gave opening remarks. He noted that Jamaica — one of the non-G7 countries, along with Marshall Islands, Norway and South Africa who sent representatives to the meeting — had worked with Canada to secure a crucial UN meeting.

Courtenay Rattray, Jamaican ambassador to the United Nations, “and the leadership of the entire Jamaican government,” helped Canada round up 60 countries for a discussion at the UN hosted by the secretary-general focusing on sustainable finance, said Blanchard.

“We’re here to show leadership and demonstrate a sense urgency through commitment,” he said. “Lots of capital is urgently needed. Governments alone cannot do it.”

In G7 economies, added Blanchard, the private sector controls most capital, so how it responds to the climate crisis can have a big impact.

“We need close partnership to ensure immediate action on disclosure, developing green financial products, building resilient infrastructure, and investing in sustainability," he said.
So Michael Sabia is sounding the alarm on climate change and asking investors to take it seriously, seeing it as an opportunity, not a constraint.

I'll tell you where I agree with Michael and where I am more cautious in my recommendations.

First, there is definitely something going on with the climate and you see it every year around this time when hurricanes, typhoons, floods and wildfires hit us hard.

The economic cost of climate change is staggering and it impacts many industries. Michael is right, climate change is real and it's gone beyond the point of being a risk.

In my opinion, we are losing the war on climate change. There are too many people on this earth with too many cars, air conditioners, eating too many burgers which come from cows emitting too much CO2.

Basically, I think we are screwed and we are beyond the point of no return.

I'm also very wary of "carbon taxes" and government policies which aren't doing anything to curb climate change. Politicians and environmentalists love these policies but when you talk to experts, they throw cold water on a lot of nonsense policies.

Anyway, those are my cynical views, but it doesn't mean we should stop trying to implement policies that make sense over the long run, and Michael is right, institutional investors that manage trillions need to step up to the plate collectively and start measuring and addressing the risks of climate change and invest in renewable energy which is profitable.

One thing, however, I'm very skeptical of divesting from fossil fuels and think the fiduciary responsibility of any pension fund manager must go first and foremost into making sure the pension plan is solvent and sustainable over the long run.

If you want to invest in solar, wind farms and other renewable energy, great, just make sure these are profitable investments over the long run.

I would like to see the Caisse and other large pensions report the returns of their green investments across public and private markets every year and over the last five years.

Don't tell us these investments are profitable, show us and convince us they make great sense over the long run.

However, Michael is right about one thing, pensions are slow to move on climate risk and they need to be more proactive when it comes to these risks.

Below, Michael Sabia, Caisse de Depot et Placement president and chief executive officer, discusses how investors are reacting to rising trade tensions with Bloomberg's Shery Ahn and Amanda Lang on "Bloomberg Markets." (June 2018)

Tuesday, September 18, 2018

CalPERS CEO Under Fire?

Adam Ashton of the Sacramento Bee reports, CalPERS hired a CEO without a college degree. Now the public pension fund is explaining why:
Marcie Frost did not claim to have a college degree when she applied to lead the California Public Employees’ Retirement System in 2016. She emphasized it in blue ink, writing “not degreed yet” in a box that asked about her education.

But two years after she got the job, Frost is under fire with a financial blogger alleging that she mischaracterized her education in her application and in a subsequent press release by implying she was further along in obtaining a degree than she actually was.

The report from blogger Susan Webber now is raising questions among retirees who are learning for the first time that the CalPERS chief executive officer did not graduate from college. Webber’s reporting this year has already led CalPERS to oust a chief financial officer and she has a dedicated readership among people who pay close attention to the fund.

“We are surprised. You just assume in today’s market if you’re going to be CEO of the nation’s largest retirement system that you’d have some kind of degree,” said Tim Behrens, president of California State Retirees. He added, “I don’t think anything happened badly because of her lack of a degree.”

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

The questions date back to the CalPERS Board of Administration’s decision in 2016 to select Frost as the successor to Anne Stausboll. Board members said they chose Frost because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.

CalPERS did not list a college degree as a necessary qualification for the job when it began searching for Stausboll’s successor. Frost said she told the board and a headhunting firm that she was interested in pursuing degrees at The Evergreen State College in Olympia, Washington, but board members did not ask her to complete a program when they hired her.

Frost, 54, said her career accelerated first in Washington state and then at CalPERS since she first took classes at Evergreen in 2010. She did not enroll in a class after that year, although she said she still intends to complete a degree some day.

“It’s something that I will finish in my life but this position at CalPERS is the most important thing I’m doing today,” she said.

Frost’s salary in her last full year in Washington state was $139,000. She earned $387,000 at CalPERS last year, according to state salary records.

No ambiguity, board members say

Five board members told The Sacramento Bee that there was no ambiguity about Frost’s education in her application or in her interviews. They said they chose her because they believed she was someone who could work with a public governing board and bring together people with strong and opposing opinions about CalPERS to advance the fund’s goals.

“It was very clear (Frost) did not have a degree,” CalPERS Board of Administration member Dana Hollinger said. “We were told she was not a college graduate. It never got more nuanced than that.”

Theresa Taylor, another CalPERS board member, said Frost closed her interview by reminding board members that she did not have a degree. Taylor said Frost told the board she was interested in obtaining one and she would make it a priority if the board asked her to do so. The board did not direct her to earn a degree.

“Quite frankly it’s not a piece of paper. It’s about somebody who can do a job. She presented herself as the best person who could do the job in that interview,” said CalPERS Board of Administration Vice President Rob Feckner. He described Frost as “up-front, very forthcoming” in disclosing that she did not have a college degree.

The chief executive is not the highest paid position at CalPERS, or the post that recommends major investment decisions for the fund. That position is chief investment officer, a position that has mandatory education requirements in its job description. CalPERS is recruiting a new chief investment officer, and Frost will oversee that position.

She rose up the ranks over 30 years in Washington State government and held a series of leadership positions at its pension fund between 2000 and 2016. She said she began working for the state on a 30-day temporary clerical contract as a young mom. That led to a nine-month contract, and eventually full-time work.

“I think that 30-day (contract) really illustrates what I did throughout my career. I work very hard, I get completely consumed by that job, and I want to build capacity in that job,” she said.

Washington State Gov. Jay Inslee, who appointed her to lead his state’s public pension fund, through a spokeswoman told The Sacramento Bee that he would hire her back “and that one of the worst things California has done is taking her from us.”

A problematic press release

The questions date back to the CalPERS Board of Administration’s decision in 2016 to select Frost as the successor to Anne Stausboll. Board members said they chose Frost because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.


Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy
Webber pointed to a section in the hiring packet that indicated Frost was pursuing dual degrees at The Evergreen State College in Olympia when she applied to work for CalPERS.

In fact, Frost had not taken classes at the college in years.

Frost told The Bee that she described her educational goals to headhunting consultant Heidrick & Struggles, which CalPERS hired to help it select a chief executive. The firm listed the degrees she hoped to obtain in the information packet it prepared for the board, describing Frost as “currently matriculated in a dual degree program.”

CalPERS included a similar description of Frost pursuing degrees at Evergeen in its press release announcing her hire and in her employee biography. CalPERS has since edited the biography in a way that deleted a reference to Evergreen.

The headline of Webber’s Aug. 27 piece on Frost’s background read, “CalPERS CEO Marcie Frost’s Misrepresentations Regarding Her Education and Work History During and After Her Hiring.”

Webber declined to speak to The Bee by phone. In an email, she said the body of her work on CalPERS speaks for itself.

CalPERS board member Margaret Brown told Bloomberg last month that she wants CalPERS to open an investigation into Frost’s hiring. Brown was not on the board when Frost was hired. So far, she is alone in demanding some kind of action following Webber’s pieces on Frost.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

In a follow-up piece on Frost’s background, Webber connected her work this year revealing misleading information in ousted CalPERS Chief Financial Officer Charles Asubonten’s application to Frost’s performance.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

“While it may seem pedantic to hector Frost over her error-rife resume, it is actually telling evidence of her failings as a manager,” Webber wrote.

She further criticized CalPERS board members for accepting claims in Frost’s application. “The fact that the board can’t be bothered to do this right says they are not fit to serve and need to be replaced,” Webber wrote.

Webber’s take on Frost’s application resonated with retirees who believe CalPERS withholds public information and suffers from weak leadership.

To them, CalPERS did not have a good reason to describe Frost as pursuing a degree when she was not enrolled in a program and not making progress toward a credential.

“Part of it for me is the pattern of secrecy CalPERS does about everything,” said Tony Butka, a former state labor relations mediator. He wrote a letter to the State Personnel Board this week asking that it investigate Frost’s hiring and discipline board member Richard Costigan. Costigan also is a CalPERS board member who has defended Frost’s hiring in news reports.

“If it was OK to have a high school degree, fine,” Butka said. “But to imply she was working on it when she’s not, that’s wrong.”

Outside groups backing Frost

Outside of CalPERS, lawmakers and advocacy groups have weighed in on Frost’s behalf since Webber began writing about Frost’s education.

“The CalPERS Board of Administration has the appropriate authority to address internal issues should anything be deemed inappropriate. I do not believe that will be necessary in this instance,” said Assemblyman Freddie Rodriguez, D-Pomona, chairman of the Public Employees, Retirement and Social Security Committee.

On the other side of the aisle, state Sen. John Moorlach, R-Costa Mesa, said he appreciated that Frost has been “accessible and she’s been willing to meet, she has experience.” Moorlach is a pension reform advocate who proposes every year to adjust the retirement benefits public agencies can offer.

The League of California Cities, which has been the most outspoken advocacy group raising concerns about CalPERS’ fiscal health since Frost took office, also continues to back her. The league earlier this year issued a report that said CalPERS fees were becoming “unsustainable” for some of its members.

Leaders of the league say Frost has motivated cities to become more active in CalPERS, and kept them informed about important votes.

“From sitting down with the League’s executive officers this last spring, to meeting with mayors and council members from all over the state in June, we have appreciated the efforts of Ms. Frost and her team to listen, actively engage our membership and identify common ground.,” league Executive Director Carolyn Coleman said.

Frost on Wednesday spoke about her background during an all-staff meeting at CalPERS. “I have to stay focused. We have to stay focused. It really is the only way we can achieve the goals we have set,” she said.
Mr. Ashton followed up on this article with another, CalPERS CEO with no college degree: ‘Integrity’ or ‘sad, sad circus?’:
A coalition of public employee unions is doubling down on its support for CalPERS CEO Marcie Frost, who has been taking heat for several weeks since a financial blogger drew attention to alleged misrepresentations in Frost’s job application and in a press announcement describing her background.

The Labor Coalition on Sept. 5 sent its letter backing Frost to CalPERS Board of Administration President Priya Mathur.

The letter, signed by California School Employees Association President Dave Low, praises Frost’s outreach to unions and public agencies. It criticizes Susan Webber, the corporate management consultant and Naked Capitalism blogger, who wrote the original pieces drawing attention to public announcements that portrayed Frost as enrolled in a college program when in fact Frost was not actively pursuing a degree.

“Our understanding is that the CalPERS board hired Marcie Frost with full knowledge of her resume, experience and education. Whether Frost has, or is currently pursuing a college degree, is therefore immaterial as long as the CalPERS board knew the facts when they made the decision to hire her. For those who believe a college degree is a requisite for a CEO, I have five words, Steve Jobs and Bill Gates,” Low wrote.



He wasn’t the only person likening CalPERS’ decision to hire Frost without a college degree to the Apple CEO Jobs. Guy Kawasaki, an early Apple marketing specialist, made the same connection on Twitter.

He tweeted a headline that began, “CalPERS hired a CEO without a college degree,” and added, “So did Apple.”



The praise does not mean Frost is in the clear. The Sacramento Bee published a story following Webber’s reporting, and many more people learned that Frost did not have a degree when the CalPERS board chose her to lead the nation’s largest public pension fund.

“CalPERS, responsible pension organization, or sad, sad circus?” wrote Lois Henry, a former Bakersfield Californian editor, on Twitter.





The board chose Frost because of her record leading Washington state’s public pension fund. It’s expected to discuss her performance at a regularly scheduled review later this month. Webber on Thursday published a letter from a former deputy state controller urging the CalPERS board to dismiss Frost.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218407085.html#storylink=cpy

“What message does the retention of the CEO send to all CalPERS active and retired members who have pursued education goals and accurately presented their qualifications for their positions?” Terrence McGuire, the former deputy controller wrote. “The board failed the membership in the CEO hiring process; I hope the board does not fail them again in the termination process.”

Low’s support for Frost is not unexpected. He often speaks for labor to defend the state’s public pension funds and unions have a large voice at CalPERS because they advocate for current employees and retirees.

His letter to Mathur was supported by the California Teachers Association, California Professional Firefighters, SEIU Local 1000, Peace Officers Research Association of California, Professional Engineers in California Government., International Union of Operating Engineers and a number of other state and local unions.
You can read Dave Low's letter to President Mathur here or here.

You can also read Susan Webber's (aka Yves Smith) comment on the naked capitalism blog here going over how Marcie Frost supposedly misrepresented her education.

I stopped reading Yves' grossly biased and unreasonably critical comments on CalPERS a long time ago. Someone should ask her straight out: "Who is paying you to attack CalPERS every chance you get?" (I'm dead serious)

Anyway, this is another much ado about nothing questionning the credentials of CalPERS' CEO Marcie Frost.

The lady did not lie about not having a college degree, she made it clear to CalPERS' board a few times and yet they hired her because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.

As far as I am aware, she did a great job there and that is why she was hired as the CEO of CalPERS.

Don't get me wrong, having a college degree is important but she was honest and has great experience and a proven track record so I don't understand why naked capitalism and others are questionning her or CalPERS' board.

It's ridiculous especially during a time when we need more women as CEOs of major corporations and public pension plans.

It's also worth noting that Mrs. Frost is not the highest paid employee at CalPERS, that honor deservedly goes to the fund's CIO as they have tremendous responsibility overseeing $360 billion in assets.

Still, she gets paid very well and has done a great job at CalPERS as far as I can tell so this really is another naked capitalism hatchet job which should be ignored.

That's all I will say on this latest CalPERS smear job. When you're reporting or blogging on something, make sure you have all the facts or risk looking like a total ass.

Below, CalPERS CEO Marcie Frost discusses agenda item 4 at the March board meeting. Listen to her speak, she might not have a college degree but she sure knows what she's talking about and she's very impressive and composed while delivering her comments.

Update: Yves Smith is back at it Wednesday, doubling down on her attacks on Marcie Frost. In my opinion, it's time CalPERS sues her for defamation, she obviously has agenda and doesn't understand the role and responsibilities of the CEO position at CalPERS.

Monday, September 17, 2018

Blackstone's $18 Billion Distressed RE Fund?

Sabrina Willmer and Heather Perlberg of Bloomberg report, Blackstone Seeks $18 Billion for Biggest Real Estate Fund:
Blackstone Group LP expects to raise $18 billion for its biggest real estate fund ever.

The firm, already the private equity industry’s largest real estate investor, will have a strategy similar to its last fund, investing in distressed properties globally, according to people with knowledge of the plans. Blackstone’s prior fund gathered $15.8 billion in 2015.

Blackstone is seeking capital at an opportune time. Institutions such as public pension plans and insurance companies are betting big on property assets to protect against inflation and broaden their holdings beyond stocks and bonds. The number of investors allocating $1 billion to the space keeps increasing, according to data provider Preqin.

A representative for Blackstone declined to comment.

In June, New York-based Blackstone raised $7.1 billion for an opportunistic real estate fund focused on Asia, and Carlyle Group LP this month also raised its largest U.S. real estate fund.

Beyond real estate, investors are piling into alternative assets, helping firms raise much larger funds than before. The private equity industry brought in a record $453 billion last year. Blackstone, like its rivals, is taking advantage of that demand. It expects to raise more than $20 billion for its eighth buyout fund, Bloomberg reported in July. Its prior buyout fund was a third invested at the end of June, according to a regulatory filing.

Gray’s Push

Real estate investments are a big profit driver at Blackstone. That can largely be credited to bets made by Jon Gray, who earlier this year was promoted to president and chief operating officer after making the firm a property giant.

Under Gray’s leadership, at the height of the real estate boom in 2007, the firm paid $39 billion for Equity Office Properties Trust and $26 billion for the Hilton hotel chain. Those investments made profits of more than $20 billion. Kathleen McCarthy and Ken Caplan took over running the real estate group this year.

Blackstone started its real estate business in 1991 and has expanded it to $119 billion in assets. It owns investments in hotels, offices, retail, industrial and residential properties in the U.S., Europe, Asia and Latin America.

The firm’s eighth real estate fund produced a 1.4 times multiple on invested capital before fees as of the end of June, according to a regulatory filing. Its funds from 2011 and 2007 reported a 1.9 times and 2.5 times gross multiple, respectively.
John O'Brien of The Real Deal also reports, Blackstone launches $18B distressed real estate fund:
Blackstone Group is looking to raise $18 billion for its largest real estate fund to date.

New York-based Blackstone will invest the money in distressed properties globally, according to Bloomberg, which first reported the news.

Its previous real estate fund raised $15.8 billion when it closed in 2015, part of $40 billion raised from its three most recent real estate funds.

Blackstone is launching the fund at a time when institutional investors are turning toward real estate to protect against inflation and broaden their portfolios. Data provider Preqin last month said the number of institutional investors that allocate $1 billion or more to real estate grew to 499 in 2018. That was up from about 436 in 2017.

In June, Blackstone raised $7.1 billion for an opportunistic real estate fund focused on Asia.

Now led by Jonathan Gray, Blackstone started its real estate division in 1991 and has amassed $119 billion in assets globally. Its portfolio includes hotel, office, retail, industrial and residential properties in the United States, Europe, Asia and Latin America.

An recent analysis by The Real Deal shows Blackstone owns 20.1 million square feet in New York alone. It also owns the iconic Willis Tower in Chicago as well as numerous properties in Los Angeles and South Florida.
So Blackstone, one of the best alternative investment firms globally, is raising $18 billion for a distressed real estate fund.

Why am I beginning my week with this article? Who cares if Blackstone is raising yet another multibillion dollar real estate fund?

Because this is a sizable fund, Blackstone's largest, and it signals where it sees opportunities in the near future.

When you're assessing risk across public and private markets, you need to pay close attention to what the leaders are doing with their own funds.

And Blackstone is definitely a leader. A distressed real estate fund of this magnitude should catch your attention and you should ask why Blackstone is raising this money.

Basically, they see dislocations in real estate and want to be prepared to pounce on opportunities as they arise.

Where will they focus their attention? I'm not privy to that information. I don't know if their focus will be in the US and which sectors they will invest in but I have a strong feeling this fund will be in high demand, unlike the massive Saudi-backed infrastructure fund it trumpeted last year which is struggling to raise money.

The main point here is focus where the big money is going. I recently discussed how PSP is bolstering its private debt arm, focusing on investments in distressed companies.

When big money is preparing for distressed debt opportunties in real estate, private debt or elsewhere, it tells you we are in the late innings of the economic cycle and stock market.

A lot of companies and real estate developers are going to have a tough time refinancing when the economy falters, and this is the environment in which is where distressed debt thrives.

Keep that mind the next time someone asks you why invest in distressed debt.

Below, CNBC's David Faber interviews Jonathan Gray, Blackstone COO and president, at the 2018 Delivering Alpha conference in July.

If I had to invest in one real estate investor, it would be with Blackstone's Crown prince, he's very impressive and knowledgeable. Take the time to watch this interview.

Friday, September 14, 2018

Late Innings of the Bull Market?

Tae Kim of CNBC reports, David Tepper says the bull market is in the late innings and he's sold some stock holdings:
David Tepper, manager of $14 billion in assets, is more uncertain about the stock market due to President Donald Trump's trade war with China.

"If we do the tariffs on China that's going to make it a little bit tough on the market," the co-founder of Appaloosa Management said Thursday on CNBC's "Halftime Report."

"It is a little tricky at this point of time. ... It's a late inning game."

He said stocks could drop 5 percent to 20 percent if trade tensions between the world's two largest economies increase.

The investor said he is now about 25 percent exposed to the stock market. Tepper called the market "fairly valued" if the U.S. doesn't impose more tariffs on Chinese goods.

"I've taken down my exposure [to equities]," he said. "I'm just not sure what's going to happen with these tariffs. ... Our whole book we probably took down 30 percent at some point, the equity part."

Last Friday, Trump said he was "ready to go" on tariffs for another $267 billion in Chinese goods, which would be on top of the proposed tariffs on $200 billion in goods already being considered.

The public comment period on the $200 billion tariff plan expired Thursday. The world's two largest economies have already applied tariffs to $50 billion of each other's goods.

In January, Tepper was more optimistic about stocks. He told CNBC that month the bull market still had room to grow, citing Trump's tax cuts and equity valuations.
Akin Oyedele of Business Insider also reports, 'It's a late-innings game:' Hedge fund billionaire David Tepper says he's dumped some stocks, and warns of a bear market if Trump's trade war worsens:
David Tepper, the billionaire hedge fund manager of Appaloosa Management, said Thursday that his firm had reduced its holdings of US stocks.

"If you ask me what inning we're in, I think it's a late-innings game," Tepper, who manages about $14 billion in assets, told CNBC of the nine-year bull market in stocks.

At issue is the ongoing trade dispute between the US and China. The Trump administration has threatened to place tariffs on all Chinese products entering the country. A $200 billion round of duties that could be announced imminently, and Trump threatened last week to impose import taxes on another $267 billion worth of products.

Additional tariffs would "make it a little bit tough on the market," Tepper said, adding that stocks could drop between 5% and 20% if the trade war worsens.

"To me, the market is fair-valued if you don't have tariffs on China," Tepper told CNBC. "But if you do have tariffs on China, the question is how high will the dollar go, and then where will earnings be in that case."

Tepper said he had reduced his exposure to US stocks, although he remained long the market. He estimated his fund had around 25% exposure to the S&P 500 after reducing it by about 30%, which has been the wrong move "because the market has been very hot."

He said he remained bullish on Facebook because the stock was still cheap.

From inception in 1993, Tepper's hedge fund generated gross annual returns of more than 30 percent, according to a source familiar with the firm's returns.

The billionaire investor is also the owner of the National Football League's Carolina Panthers.
Earlier this week, I went over why Bridgewater's founder Ray Dalio thinks we are in the 7th inning of the economic cycle, stating the following:
[...] is Ray right, are we in the seventh inning of the economic cycle? Nobody really knows but if you ask me, we are closer to the ninth inning as the cycle has already peaked according to leading economic indicators and global PMIs.

People focusing on inflation and employment are focusing on lagging and coincident economic indicators which is typical at this point of the cycle.

So whether we are in the 7th or 9th inning, it doesn't matter because I agree with Ray, as time goes by, the risks are rising and investors need to position themselves defensively now to prepare for the eventual slowdown.

It's important to understand why risks are rising. As the Fed raises rates, it reduces global liquidity, spreads start to widen, the US dollar gains and financial conditions become more restrictive. The lagged effects of rising rates is starting to hit risk assets, especially emerging market stocks and bonds.

So, on the one hand, the US economy is roaring according to employment indicators but on the other, emerging markets are getting whacked hard and the risks are if the Fed continues raising rates, it will precipitate an emerging markets crisis which is deflationary.

Can we avoid a hard landing? Sure, if the Fed stops raising rates and pays more attention to what is going on outside the US, we can avoid a hard landing.

My fear, however, is the Fed is already determined to continue raising rates based on lagging and coincident economic indicators and just keeping an eye on what's going on in emerging markets.

This is where a policy error can happen because if the Fed overdoes it and raises rates too much, it will trigger a crisis in emerging markets, and we will need to prepare for a deflationary wave.
Now we have another hedge fund titan, David Tepper, telling us it's late innings for stocks. Is he right?

Calling the economy is a little easier for me than calling stocks and I'll explain why. Stocks move based on a lot of factors including liquidity.

Even though the Fed and other central banks are raising rates, removing global liquidity, there's still plenty of juice to drive stocks and other risk assets higher.

So, yes, I agree with Tepper, we are in the late innings for stocks which are a leading indicator of the economy, but it's at this stage of the market where risks are high for parabolic moves.

In fact, the whole tech bubble went parabolic a year after the Fed started raising rates and it lasted a lot longer than skeptics thought, decimating many value managers.

Value managers are lagging far behind growth managers again this year, which is normal. In a video clip this week, Francois Trahan and Michael Kantrowitz of Cornerstone Macro went over the structural shifts explaining why growth will continue to outperform value, highlighting these points:
  • Structural Shift In Growth/Value Complicates Historical Comparisons
  • Scarcity Breeds Premium: It’s Becoming Harder To Find Structural Growers
  • Growth Has Beaten Value in 2018 DESPITE Historical Valuation Spread
  • Beware Of Value: Low PE Stocks Used To Be Low Beta, Now Higher Beta
  • Valuation In Context: S&P500 Is Now Growthier Relative To Its History
I highly recommend you subscribe to their research, it is excellent.

According to Francois, the rally in growth stocks is "textbook at this stage" where investors are defensive and it's normal to see breadth narrowing.

However, he too is telling investors to start focusing on defensive sectors because the lagged effects of interest rate hikes will eventually hit all risk assets.

But if you drill down on markets, you see crazy things happening at stock levels. For example, look at shares of Tilray (TLRY), a company that engages in the research, cultivation, processing, and distribution of medical cannabis (click on image):


As you can see, animal spirits are alive and well, especially in pot stocks but as I stated on StockTwits last night,  momos are driving this game and a lot of retail investors are going to get burned badly buying these stocks, especially after a parabolic move.

Other stocks that caught my eye? Look at shares of Advanced Micro Devices (AMD) which have more than doubled in value this quarter (click on image):


AMD is one of the best-performing chip stocks which is great news for Vanguard, BlackRock and Fidelity, the top institutional holders, but also for top hedge funds like Renaissance Technologies and Balyasny which increased their stake significantly in the second quarter (click on image):


You'll recall when I went over top funds' activity in Q2 2018, I went over another semiconductor stock:
When I went over Q1 activity, I went through a lot of stuff, like why I wasn't so convinced with David Tepper's decision to increase his holdings of Micron Technology (MU). It turns out I was right:


Still, Tepper significantly increased his stake in Micron again in Q2 and is the fifth largest institutional holder of the stock.

Maybe there is a bounce to be played here but I wouldn't buy and hold it, that's for sure.
Shares of Micron Technology (MU) bounced on Thursday but they've been struggling this year, especially since the second quarter (click on image):


It's a tough market and even hedge fund gurus can get their stock picks wrong.

Still, as I stated last week in my comment on the confounding market, you can't throw in the towel on semiconductor stocks but you need to pay attention to them:
[...] semi stocks (SMH) are getting knocked off their perch and some market watchers think it's the canary in the coal mine.

Looking at the 5-year chart, I'm not worried yet, but definitely keeping a close eye on semis as I do believe they can get hit more if global growth continues to deteriorate.


Lastly, on global growth, Colby Smith of the Financial Times reports, The EM rout is not made in America:
As Turkey, Argentina and South Africa have come under pressure in recent months, many market watchers have blamed the Federal Reserve's tightening timeline. Yes, higher US interest rates do raise the cost of borrowing and put upward pressure on the dollar. But what's really driving emerging market pain has less to do with the Fed and more to do with domestic fundamentals and the global business cycle.

According to BCA Research, the correlation between EM risk assets and the fed funds rate is not that tight. In fact, there have only been two episodes since 1980 when emerging markets cratered as US interest rates ticked higher. And during both —the 1982 Latin American debt crisis and the 1994 Mexican Tequila crisis—the combination of high external debt, substantial current account deficits and pegged exchange rates laid the foundation for an unravelling. As indicated by the shaded grey areas, EM stocks and currencies have been more likely to perform well as the Fed tightened monetary policy:


What distinguishes these periods from 1992 and 1994 is basic domestic fundamentals. In other words, if an emerging market is on sound financial footing, the Fed's policy stance has minimal impact. During the debt crisis of 1997-8, imports grew in the US and Europe, Treasuries yields fell and equities in the US were in a bull market. Here's how the S&P 500 moved with stock prices across Asia stocks between 1993 and 2000:


Most emerging-market economies thrived. The ones that didn't had bigger external imbalances.

The hardest-hit emerging economies today share many of the same weak fundamentals that have sunk developing markets in the past: dual deficits, runaway inflation and a heavy reliance on external funding. But beyond domestic fundamentals, what drives emerging markets if not the Fed?

China.

Displacing the US, China has become the main export destination for many emerging market countries — Brazil, South Africa, Malaysia and the Philippines. The relationship has become so pronounced that China's import growth correlates closely with the export growth for many emerging economies. While this does not imply causation, TS Lombard points out that it illustrates just how synchronised global trade has become with Asia's biggest buyer:


That linkage has become more problematic as China's growth slows. In August, the Caixin manufacturing PMI index fell to a 14-month low as new orders dried up. And as China attempts to delever, constrained credit growth has curbed investment in capital-intensive infrastructure projects. Emerging markets and G10 economies are already beginning to feel pinched. Here's a chart from Citi showing China's weight on the rest of the world:


Unfortunately for emerging markets, the world's second-largest economy is unlikely to see a reprieve anytime soon. The US is finalising plans for another round of tariffs on $200bn of Chinese imports. And this week, President Trump warned that additional levies on the remaining $267bn could come soon after that.
This is what worries David Tepper, an all-out trade war with the US can hit China and emerging markets' exports hard.

And even though emerging market stocks (EEM) and bonds (EMB) bounced this week, the trend is still down for the year (click on charts):



I'd also be very careful with that BCA chart showing a weak correlation between EM risk assets and the fed funds rate. We weren't on the precipice of a full-blown trade war back then and China wasn't the main driver of emerging markets' export growth.

Keep your eyes peeled on the US dollar (UUP) and US long bonds (TLT), this is where you'll see the global risk barometer (click on image):



There has been a bit of a pullback in both, giving emerging market risk assets some breathing room, but if all hell breaks loose, I expect the US dollar and US long bonds to rally concurrently, which isn't the norm but when global investors are scared, they flock to US assets (which is why US stocks have outperformed global stocks so much this year).

Below, Appaloosa Management's David Tepper said that tariffs on China were a "blunt" move for the Trump administration, but that maybe it was the right move because it is for the "future of our country". He also said the stock market may endure a little pain with tariffs on China, but that the markets will eventually adjust.

It remains to be seen just how painful the adjustment will be and that in my opinion depends on how much the Fed tightens given what is going on in emerging markets.

As always, I kindly ask all my readers to support this blog via a donation. You can donate and/or subscribe via PayPal on the right-hand side, under my picture. I sincerely thank all of you who take the time to donate or subscribe. Have a great weekend!


Thursday, September 13, 2018

UK's Railpen Snags BCI Executive?

Susanna Rust of Investment & Pensions Europe reports, RPMI Railpen hires from Canada for chief fiduciary officer position:
RPMI Railpen, the in-house manager of the industry-wide scheme for UK railway companies, has appointed Michelle Ostermann to the new role of chief fiduciary officer for investments.

Ostermann will join the manager in January next year. She will be responsible for determining the £28bn (€32bn) railway pension schemes’ high-level investment strategy and risk appetite, as well as defining the range of internally managed pooled funds.

The manager said she would work closely with the investment, funding and covenant teams in proposing tailored solutions for the multi-employer sectionalised schemes.

She will also be responsible for the manager’s sustainable ownership strategy and client relationship management.

Ostermann will join from British Columbia Investment Management, where most recently she was senior vice president, corporate and investor relations. From 2013 to June 2017 she was senior VP for investment risk, strategy and research at the Canadian asset manager. She has also held senior positions at Manulife and Sun Life Global Investments, and is the vice chair of the board of directors of the Pension Investment Association of Canada.

Julian Cripps, managing director at RPMI Railpen, said: “Michelle brings a wealth of international experience to RPMI Railpen and her proven track record of leading teams to deliver best practice across the institutional investment industry will be invaluable as we continue to fulfill our mission to pay members’ pensions securely, affordably and sustainably.”

Ostermann is the latest appointee to the UK pension investor’s leadership team. Earlier this year Railpen appointed its first chief investment officer and head of private markets, positions that were filled internally. In February, Philip Willcock replaced Chris Hitchen as CEO.
Paulina Pielichata of Pensions & Investments also reports, RPMI Railpen adds chief fiduciary officer:
Michelle Ostermann was named chief fiduciary officer, investments at RPMI Railpen, the manager of the £28 billion ($32 billion) Railways Pensions Scheme, London, a spokesman said.

The position is new. Ms. Ostermann will start Jan.1 and will be responsible for high-level investment and risk strategy of pension funds for the employees of U.K. railways. She will be defining the range of internally managed pooled funds, focusing on sustainable ownership strategy and client relationship management.

"(Ms. Ostermann) brings a wealth of international experience to RPMI Railpen, and her proven track record of leading teams to deliver best practice across the institutional investment industry will be invaluable as we continue to fulfill our mission to pay participants' pensions securely, affordably and sustainably," said Julian Cripps, managing director at RPMI Railpen, in a news release.

Ms. Ostermann previously was senior vice president at the C$145.6 billion ($112 billion) British Columbia Investment Management Corp., Victoria, where she was responsible for leading the corporate and investor relations team. A spokesman could not be reached to comment about a replacement.
I've never met Michelle Ostermann but on her LinkedIn profile, it clearly states she is the Senior Vice President, Consulting and Client Services at BCI (formerly called bcIMC) with the following responsibilities:
For almost twenty-five years I have tackled a wide variety of roles which have helped me develop a comprehensive understanding of the global investment industry. I have held positions that span both institutional pension and retail investment businesses such as:
  • Actuarial portfolio management, ALM
  • Investment risk management and governance
  • Total portfolio management, asset allocation, macro research & investment strategy
  • Product development, marketing & business development
  • Communications, stakeholder relations & media
I have been fortunate enough to have tackled some very large and influential projects for some of the largest financial institutions in Canada. I’ve gained very broad experience managing large pools of multi-client public assets and even larger balance sheets for publicly traded highly regulated financial services firms. This breadth has provided me the opportunity to learn global best practices across all aspects of the investment industry, across all asset classes, which I have successfully applied to several transformative projects.
  • Developed a world class investment risk management team (25 ppl) and governance model
  • Re-invented Canada’s leading segregated fund product
  • Built from scratch a global asset allocation team, managing $6B AUA for six different divisions/countries
  • Constructed and managed global multi asset class target risk and target date funds, $2B AUA
I am currently the Vice Chair of the Board of Directors of the Pension Investment Association of Canada (PIAC) and a proud member of the Junior Achievement BC Board of Directors. I have a Bachelor of Science degree in Economics and hold a Chartered Financial Analyst designation (CFA).
Obviously, Mrs. Ostermann has great experience and she's very competent and smart. All these attributes attracted her to her new employer, RPMI Railpen.

Now, I'm not sure why Mrs. Ostermann is leaving BCI, she might have fallen victim to the toxic work environment or decided to leave on her own, but that doesn't matter now as she has a great position at Railpen where she can capitalize on her experience.

The only thing I can share with you is the person who informed me of her departure also shared this with me: "This was not in the least what staff was told about the departure. Unreal."

Anyway, Mrs. Ostermann will now be part of a small group of highly competent women in the pension industry with very senior investment and risk roles.

In particular, off the top of my head, she joins people like Barbara Zvan, the Chief Risk Officer at OTPP, Julie Cays, CIO of CAAT Pension, Debra Alves, Managing Director/CEO of CBC's Pension Plan and Marlene Puffer, President and CEO of CN Investment Division.

I actually met Marlene recently as she took over the helm at CN Investment Division from Russ Hiscock. She's a very bright lady with great credentials and experience and she also once worked at BCA Research writing a fixed income product, so we shared some of the same experience.

Apart from these ladies, the Ontario Teachers' Pension Plan recently appointed Gillian Brown as Senior Managing Director, Capital Markets. Mrs. Brown was appointed to this important role and Stephen McLennan was appointed Senior Managing Director, Total Fund Management following the departure of Michael Wissell who joined HOOPP (Healthcare of Ontario Pension Plan) as the Senior Vice President - Portfolio Construction and Risk (good for him).

Below, Investopedia spoke with some of the leading women in finance about their careers, influences and lessons learned along the way. Interesting views which should be taken into account.