Thursday, February 2, 2012

CPPIB's David Denison Down Under?

Nichola Saminather of Bloomberg reports, Canada Pension to Grow Australia Investments for Higher Returns:

The Canada Pension Plan Investment Board, which manages about C$155 billion ($155 billion), plans to increase its longer-dated investments in Australia to boost returns, Chief Executive Officer David Denison said.

“We would like to grow CPPIB’s presence here,” Denison told the Canadian Australian Chamber of Commerce in Sydney today, according to an e-mailed copy of his speech. “Long duration infrastructure assets are highly attractive investments for us because we manage a portfolio that spans multiple generations.”

The pension fund is no stranger to Australia, with more than half of its C$10 billion allocated to Asia-Pacific region invested in the country, he said. It has partnered with the Australian Future Fund and with real estate companies including Westfield Group, Goodman Group and Dexus Property Group, and has been a shareholder of some of the nation’s biggest companies including BHP Billiton Ltd., Commonwealth Bank of Australia and Newcrest Mining Ltd.

The fund, forecast to double to more than C$300 billion within the next decade and to more than CS$500 billion by 2031, is looking oversees as it seeks to ensure future cash flows, Denison said. Australia’s commodities and connections to fast- growing Asian markets, tax policies and promotion of private ownership of infrastructure make it an attractive destination, he added.

The fund remains concerned about the openness of Australia and other countries to foreign ownership of their assets, Denison said, citing the government’s rejection of a proposed merger between the Australian stock exchange and its Singaporean counterpart.

He also expressed concern that more investors, particularly pension plans and life insurance companies, are shortening their investment horizons, doing away with their ability to provide more sustainable funding for longer-term projects.

Indeed, the Globe and Mail reports that Denison sees protectionism as a rising threat:

Protectionism is increasingly standing in the way of investors, warns CPP Investment Board chief executive officer David Denison, who also suggests Ottawa clarify Canada’s takeover rules.

The comments by Mr. Denison, who oversees the management of $152-billion that will be used to pay retirement benefits to 18 million Canadians, were made in the text remarks to a business audience in Sydney, Australia, Thursday. He said that many governments are blocking deals “at a time when the world arguably most needs to accelerate trade, capital flows and economic activity to stimulate growth.”

European antitrust officials blocked a proposed merger between the Deutsche Boerse and the NYSE Wednesday, and Mr. Denison cited Canada’s decision to reject BHP Billiton’s bid for Potash Corp. and Australia’s rejection of a merger between Australia and Singapore’s stock exchanges, as recent examples of the growing influence of protectionism. He urged policy makers “to create transparent processes and decision criteria so that there is more predictability of outcomes for investors and corporations.

“I can certainly say that the presence of opaque policy criteria and decision-making processes absolutely influences where we at CPPIB – and we believe other investors and companies as well – direct their efforts,” he added.

Those comments suggest that Ottawa’s decision not to clarify the Investment Canada Act could cause foreign investors to back away from deals here.

The Globe and Mail recently reported that the Harper government appears to have dropped plans to clarify the rules for foreign takeovers, a source of frustration for Bay Street advisors and potential investors who are unsure how Ottawa would react if an acquirer were to bid for a major Canadian company.

When the government blocked BHP Billiton’s bid in late 2010, the industry minister at the time, Tony Clement, vowed to spell out some principles about takeovers of Canadian companies. He also said he would ask the House of Commons industry committee to review the Investment Canada Act, which governs such deals, and suggest improvements. But neither of those things has happened and the new Industry Minister, Christian Paradis, has said little on the topic.

Mr. Denison also outlined another worry of his these days: that new regulations are pushing many investors, from European pension plans to Canadian insurers, to invest for the short term rather than the long term.

When it comes to pension plans, “the strict solvency rules being proposed within the European Union and contemplated elsewhere, if enacted, will likely materially hinder their ability to make long-term investments,” Mr. Denison said. At the same time, mark-to-market accounting rules and other new regulations are having the same impact on insurers.

This, Mr. Denison believes, is a danger to the financial system as a whole.

Long-term investors can play an important role in helping to stabilize markets in times of stress – they can act as liquidity providers and counter-cyclical investors in such times to counter-balance the actions of other investors,” he said. “They can be the providers of capital for important long-term projects such as infrastructure or the development of new energy capabilities for example.”

Mr. Denison urged policy makers to think about the implications of their decisions.

“We encourage them to make choices that will maintain more open investment regimes and foster long-term investing,” he said.

The Australian picked up on that last point, reporting the following:

Mr Denison is also concerned about “signs of a shrinking universe of long horizon investors and corresponding availability of true long-term capital”.

“The impact of mark to market accounting requirements on insurance company investment portfolios and other regulatory pressures on them is also reducing their capacity to act as long horizon investors,'' he will say.

He believes CPPIB is less focused on interim changes in asset prices and instead on long-term income growth and/or long-term capital appreciation both in their initial evaluation and continued interaction with their investments.

“Our view is that there aren’t many entities that fit this definition and worryingly some proposed regulatory and other changes would reduce the existing number,” he will say, noting that long-term investors can play an important role in helping to stabilise markets in times of stress.

The value of CPPIB's funds under management is now around $155 billion and that is forecast to grow to more than $300 billion within the next decade and then to more than half a trillion dollars by 2031.

More than $10 billion is invested in the Asia Pacific region and half of that is in Australia.

In 2010 CPPIB acquired Intoll, the owner of the Westlink M7 in Sydney and about a third of Toronto's 407 ETR for $3.44 billion.

It also has a half share of the Northland Shopping Centre in Melbourne, supported Goodman Group's recapitalisation in 2009 and acquired 100 per cent of the Macquarie Communications Infrastructure Group for $1.64 billion.

The Canadian group also committed $375 million in 2010 to the Colonial First State Global Asset Management Property Retail Partnership, alongside the Future Fund and two large superannuation funds.

Denison is right, unlike mutual funds or hedge funds, pension funds can use their deep pockets to buy private and public assets on the cheap, especially after a market dislocation, and wait for them to recover, making excellent returns in the process.

I also like his comments on pensions as a cyclical stabilizer. Think about it, in severe market dislocations like 2008-09, who is the buyer of last resort? Pensions, sovereign wealth funds, endowment funds, and central banks.

Importantly, when everyone is scared to death, someone has to come in to buy cheap assets, providing much needed liquidity to markets.

This also reminds me of something Leo de Bever, President and CEO at AIMco, told me over breakfast. He said that a lot of funds got caught in the credit crisis because the banks and brokers tightened margin requirements, forcing them to deleverage. "If pensions provided these funds with liquidity and their line of credit during the crisis, it would have mitigated the excesses of forced deleveraging."

As far as Denison's comments on protectionism, he's right about that too. It never fails to amaze me how stupid policy makers are during economic downturns. Austerity and protectionism are sheer insanity during a debt deflationary/ deleveraging cycle.

On a more critical note, I do take issue with a major Canadian pension plan investing more in Australia. Why? Because essentially both countries have a very similar profile (commodity exporters) and are vulnerable to the exact same shock, namely, a major shock in China. Also, both countries face their own domestic issues, like high consumer debt and a bubble in their housing market.

It's true that Australia offers nice investment opportunities, especially in private markets where the legal system and government regulations are crucial factors, but CPPIB needs to consider how such exposure will impact their overall fund on many levels. They need to talk to their external managers, including Bridgewater which is betting against the Australian dollar and several emerging-market currencies.

Importantly, just because you're a long-term investor, doesn't mean you can't get caught in a severe downturn which may take several years to resolve.

Pension funds allocate risk across public and private markets. It's critically important to understand the dynamics and correlations between public and private markets, especially for more mature plans which do not have CPPIB's or PSPIB's generous cash inflows (liquidity).

What else? I'd like to see CPPIB and other large public pension funds focus more on opportunities in Europe. Admittedly, it is a bureaucratic nightmare, especially in countries like Greece, but if you ask me, that's where the big juice lies.

Pension funds that want to invest in European infrastructure should hire the right people, not investment bankers, but people with extensive operational experience, solid contacts at top European infrastructure firms, and extensive knowledge of the legal and government bureaucracies in Europe.

Amazingly, I know one excellent candidate which the Caisse, CPPIB and PSPIB foolishly passed over, much to their detriment (ridiculous, this guy can dance circles around their heads of infrastructure and he is a smart, solid and ethical manager with extensive infrastructure experience).

Anyways, you can read David Denison's entire speech here. Everyone should read this speech, including Prime Minister Harper who has been feeling the heat over pensions lately. Although David Denison can't express his opinions on the ongoing debate, I know he too is a staunch supporter of defined-benefit pensions plans.

Below, Australian Trade Minister Craig Emerson talks about the outlook for the nation's economy and trade within the Asia-Pacific region. Australia’s trade surplus unexpectedly widened in December as stronger exports of gold and coal outpaced increases in imports of fuel and lubricants. Emerson also discusses Europe's debt crisis. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia."

No comments:

Post a Comment