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Showing posts from January, 2013

Pensions Taking On Too Much Illiquidity Risk?

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My last comment on the Caisse focusing on illiquid asset classes generated a few excellent responses, so I decided to follow-up on this topic. Let me begin with what a former pension fund manager shared with me after reading my comment:
Excellent article. I am always impressed to see that some investors still think that illiquid assets are less volatile. Most investors know that illiquid assets have their traditional risk measures (standard deviation, covariance, correlation and beta) underestimated due to stale pricing and infrequent “third-party” valuations. Of course, one can use relatively simple statistical adjustments to estimate the true underlying risk but many investors still prefer to stick with the underestimated risk measures.

Private equities generally use more leverage than the average public market investment. It is therefore not surprising to observe a statistically adjusted Beta higher than one. A leading edge Canadian investment organization assumes an a…

Caisse to Focus on ‘Less Liquid’ Assets?

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Frederic Tomesco and Doug Alexander of Bloomberg report, Caisse to Focus on ‘Less Liquid’ Assets, CEO Sabia Says:
Caisse de Depot et Placement du Quebec, Canada’s second-largest pension-fund manager, will increase investments in assets such as real estate, infrastructure and private equity to reduce volatility in its returns, Chief Executive Officer Michael Sabia said.

“The markets are no longer a good gauge of value,” Sabia told reporters today during a briefing in Montreal. “Markets are a source of volatility. We think this volatility will last quite some time.”

The Caisse plans to add C$10 billion ($9.97 billion) to C$12 billion in what it calls less-liquid investments in the next two years, Sabia, 59, said. The Montreal-based fund manager seeks to have about 30 percent of its assets in private equity, real estate and infrastructure by the end of 2014, up from 25 percent.

“We have to find a replacement for the performance in fixed-income that will no longer be there,” Sabia said. “W…

Five Reasons to Go Slow on C/QPP Expansion?

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Fred Vettese, chief actuary of Morneau Shepell, wrote an op-ed for the National Post, Five reasons Canada should go slow on CPP expansion (h/t Suzanne Bishopric):
In December 2010, the federal and provincial finance ministers examined Canada’s retirement system and concluded it was reasonably sound.

At most, the system seemed to be in need of nothing more than minor tinkering. Thoughts of increasing the pensions paid under the Canada/Quebec Pension Plan (C/QPP) were shelved indefinitely and the focus shifted to developing a new, voluntary retirement savings vehicle: Pooled Registered Pension Plans (PRPPs).

Two years later, the federal government stunned many pension observers by announcing it will reconsider expanding the Canada/Quebec Pension Plan after all. Various options for expansion will be discussed by the finance ministers in June. 
So what happened? In 2010, Alberta and Quebec were both opposed to expanding the C/QPP with only Ontario keen to proceed. The recent electi…

Dangers of Fighting the Last Investment War?

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Tadas Viskanta of Abnormal Returns writes on the dangers of fighting the last investment war:
It is often said that generals are always preparing to the fight the last war. The same thing could be said of investors as well. Investors are prone to extrapolate the recent past well into the future. For example, nearly four years into a bull market only now are investors beginning to put money back into equity mutual funds.

This point is well-illustrated in a series of graphics from David Rosenberg, via Business Insider, showing magazine covers from the most important eras finance of the past two decades. These include the Internet bubble, housing boom and the Great Recession. These compilations show how investors become slowly convinced as to the inevitability of the trend at hand.

In terms of trends there are few more well-established than the bond bull market. For over thirty years now bond yields have done little more than go down. Maybe because the trend has been so long-stan…

Hedge Fund Cannibalism?

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Sam Forgione of Reuters reports, Rumble in the Wall Street jungle: Ackman, Icahn duke it out on TV:
Two of the most prominent investors in the world, Carl Icahn and Bill Ackman, had Wall Street mesmerized on Friday as years of acrimony exploded into a bruising verbal scrap on live TV.

Initially CNBC was only talking to Ackman, but then the cable TV station put Icahn on as well and all hell broke loose.

The argument centered on nutritional supplements company Herbalife Ltd (HLF), in which Ackman has had a well-publicized short position that Icahn has slammed.

Icahn, 76, who has gone from feared corporate raider to activist investor in more than three decades of dealmaking, called Ackman, 46, a "liar" and "the most sanctimonious guy I ever met in my life."

In a tirade that included expletives, Icahn said he would never invest with Ackman and predicted investors in his Pershing Square hedge fund would lose a lot of money on the Herbalife bet. U.S. news outlets have re…

Pensions Bet Big With Private Equity?

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Michael Corkery of the WSJ reports, Pensions Bet Big With Private Equity:
On the 13th floor of a sleek downtown office building in Austin, Texas, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses. The office's occupant isn't a high-flying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.

It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.

The $114bn Texas fund has hit the trend particular…