Monday, October 31, 2016

Lessons For Harvard's Endowment?

Nicholas A. Vardy, Chief Investment Officer at Global Guru Capital, wrote a comment for MarketWatch, How one man in Nevada is trouncing the Harvard endowment:
This past weekend, I attended a gala reception for over 500 European Harvard alumni gathered in the impressively refurbished main hall of the Deutsches Historisches Museum (German Historical Museum) in Berlin.

Harvard's President Drew Faust regaled alumni with self-congratulatory statistics on how Harvard is spending the fruits of its current $6.5 billion fund raising campaign, refurbishing undergraduate housing and getting Harvard' science and engineering departments up to snuff.

There was other news from Cambridge, Massachusetts that President Faust ignored in her polished plea to well-heeled alumni in Berlin.

And that has been the embarrassing performance of the Harvard endowment over the past decade.

For all of Harvard's fund raising prowess — second only to Stanford — six years of Harvard's current capital campaign has been barely enough to offset the decline in the value of the Harvard endowment since 2011.

Almost a decade after reaching its peak, the Harvard endowment is smaller today in nominal terms than it was in 2007.

Boasting a value $35.7 billion, Harvard's endowment tumbled about 5% or $1.9 billion over the past 12 months. A big chunk of the most recent drop stemmed from Harvard endowment forking over $1.7 billion to the university itself– a roughly 30% subsidy to its annual operating budget.

What is of growing concern to Harvard alumni and staff is that Harvard endowment's investment returns over the past 12 months were a negative 2%. That (yet again) trailed traditional rival Yale, which eked out a 3.4% gain.

Harvard's Endowment: A State of Crisis

So what is the culprit behind Harvard's poor investment performance?

Some of last year's poor performance may be due to bad luck. After a volatile start to the year, Harvard's portfolio of publicly traded stocks lost 10.2% through June 2016. Throw in a couple of unfortunate blow ups in Latin America, and voila — the Harvard endowment recorded its first annual loss since 2008.

Still, concern about Harvard's poor investment performance is about more than just a single unlucky year.

Over the past decade, the Harvard endowment has generated an average gain of just 5.7%. Harvard's five-year track record of 5.9% puts it at the back of the class among its Ivy League rivals, just ahead of Cornell.

Not that the school hasn’t noticed.

The Harvard endowment plowed through several CEOs in recent years. The recently hired former head of Columbia's endowment will be the eighth CEO to lead the Harvard endowment — including interim heads — in the past 12 years. His predecessor left after just 18 months on the job.

The largest university endowment in the world has not lacked for investment talent. The Harvard Management Company's staff is chock full of former Goldman Sachs partners and other high-compensated Wall Street investment talent

Nor has Harvard's staff of around 200 former Masters of the Universe been shy about writing themselves checks for huge salary and bonuses. Former CEO Jane Mendillo earned $13.8 million in 2014. Other top traders at Harvard have made as much as $30 million in a single year.

How Nevada is embarrassing Harvard

Carson City, Nevada, is a long way from Cambridge, Massachusetts.

That's where Steve Edmundson manages the Nevada State Pension fund — which, at $35 billion, is just about the same size as the Harvard endowment. Nevada's State Pension fund, however, differs from Harvard in other crucial ways.

First, Steven Edmundson is the only investment professional managing the Nevada State Pension Fund. The University of Nevada, Reno, alumnus has no other internal professional staff.

His investment strategy?
Do as little as possible — usually nothing. That is because Edmundson invests Nevada's pension fund's assets in low-cost passive investment vehicles.
Second, Edmundson earns an annual salary of $127,121.75. That's a long way from the multimillion dollar pay packages collected by top portfolio managers at Harvard. Ironically, his salary also matches just about exactly the $126,379 salary of an Assistant Professor at Harvard — typically a 27-year-old academic who has just completed her Ph.D.

Third, and perhaps most astonishingly, the Nevada State Pension Fund's investment track record soundly beats the Harvard endowment over the past decade.

While Harvard returned 5.7% annually over the last 10 years, the Nevada State Pension fund has generated annual returns of 6.2%. Over five years, Nevada has extended its lead, returning 7.7% per annum, while has Harvard stagnated at 5.9%. That outperformance of 1.8% per year is a country mile in the investment world.

As it turns out, Nevada is also beating the returns of the nation's largest public pension fund, the California Public Employees' Retirement System, or Calpers. Nevada's investment returns beat Calpers over one-, three-, five- and 10-year periods.

Sure, Calpers is a different beast, managing about $300 billion. However, it also has a staff of 2,636 employees to generate its returns

Edmundson is essentially a one-man band.

What is to be done?

So does Nevada's outperformance of the Harvard endowment mean it should abandon the famous "Yale model" of endowment investing with its eye-popping allocations to alternative asset classes like private equity, venture capital, and hedge funds?

Should Harvard mimic the Nevada State Pension fund success, fire the bulk of its investment staff, and only invest in low-cost index funds ?

Although that strategy would likely improve Harvard's investment performance, the answer remains "probably not."

Over the past 10 years, Yale has generated an annualized return of 8.1% on its endowment with a staff of about 25 investment professionals, by definition staying true Davis Swensen's original "Yale model."

And after all, Yale did outperform Nevada's 6.2% return over the past decade. An outperformance of 1.9% per year is substantial.

So it seems less that the "Yale model" itself is broken than it is Harvard's investment team that has tripped over itself during the past decade. But it does mean that the Harvard endowment and its overpaid staff of 200 investment professionals has to get its act together.

And it had better do so ... and fast.
On Friday, I went over why Harvard's endowment was called "fat, lazy, stupid" and why the McKinsey report highlighted some disturbing issues where past investment officers manipulated benchmarks in real assets to pad their performance and justify multimillion dollar bonuses.

Over the weekend, I continued reading on Harvard's endowment and came across this and other articles. In early October, Paul J. Lim wrote a comment for Fortune, 3 Reasons That Harvard’s Endowment Is Losing to Yale’s:
The largest educational endowment in the world is under new management, and it’s easy to see why.

Harvard Management Co., which oversees Harvard’s mammoth $36 billion endowment, has named Columbia University’s investment chief N.P. Narvekar as its new CEO. At Columbia, Narvekar produced annual total returns of 10.1% over the past decade, which trounced the 7.6% annual gains for Harvard.

The hiring comes days after Harvard’s investment fund reported a loss of 2% in the 12 months ended June 30. Making matters worse, rival Yale announced that its $25 billion endowment grew 3.4% during that same stretch, leading the student editors of the Harvard Crimson to declare: “This is unacceptable.”

The prior year wasn’t much better. While Harvard’s endowment gained 5.8% in the prior fiscal year ending June 30, 2015, that performance ranked second-to-last among all Ivy League endowments, earning half the returns of Yale.

Normally, differences of this magnitude can be chalked up to basic strategy. But the fact is, Harvard and Yale invest rather similarly. Instead of simply owning stocks and bonds, both endowments spread their wealth among a broader collection of assets that include U.S. and foreign stocks, U.S. and foreign bonds, real estate, natural resources, “absolute return” funds (which are hedge-fund-like strategies), and private equity.

Still, there are subtle differences between the two approaches. And while most investors don’t have access to—or interest in—exotic alternatives like private equity and venture capital funds, the differences between the performance of the Harvard and Yale endowments offer a few lessons for all investors.

#1) Focus your attention on what really matters.

Academic research shows that deciding on which assets to invest in—and how much money to put in each type of investment—plays a far bigger role in determining your overall performance than the individual securities you select.

But while Harvard and Yale’s investment management teams both spend time concentrating on their “asset allocation” strategies, only one gives it its full attention.

Yale runs a fairly streamlined office with a staff of just 30. That’s because the actual function of picking and choosing which stocks or bonds or real estate holdings to invest in—and how best to execute the actual trades—is farmed out to external managers at professional investment firms.

This allows the Yale Investments Office to spend all its time figuring out the optimal mix of investments based on their needs and the market climate.

Harvard, on the other hand, runs what’s called a “hybrid” system. In addition to setting asset allocation policies and hiring external managers like Yale does, the investment staff at Harvard Management Co. also directly invests a sizeable portion of the endowment itself, selecting securities and being responsible for executing the trades.

This is why HMC employs more than 200 staffers by comparison.

Yet as Harvard’s recent performance shows, it’s hard to be good at all aspects of investing.

Indeed, Robert Ettl—who has been serving as HMC’s interim chief executive and will become chief operating officer under Narvekar—noted in a recent report that the endowment’s disappointing showing “was driven primarily by losses in our public equity and natural resources portfolios.”

Ettl went on to note that “we have repositioned our public equity strategy to rely more heavily on external managers”—a tacit admission that Harvard’s internal equity managers were probably responsible for a decent portion of that poor performance.

And as for the natural resources segment of HMC’s portfolio—which involves owning physical commodities such as timber on plantations owned and managed by Harvardthat lagged its benchmark performance by a massive 11 percentage points in fiscal year 2016. As a result, Ettl said HMC recently replaced the internal head of its natural resources portfolio.

#2) Turnover is never good, especially when it comes to management.

At Yale, David Swensen has managed the school’s endowment for 30 straight years, generating annual returns of about 14% throughout his tenure, far in excess of his peers and the broad market. That long, stable tenure has allowed Yale to maintain such a consistent strategy—of being willing to delve into somewhat risky and illiquid assets including venture capital, private equity, hedge funds, and physical assets—that this approach is now called “the Yale Model.”

Harvard is another story altogether.

When Narvekar assumes his duties at HMC on December 5, he will be the eighth manager to lead Harvard’s investment portfolio—including interim heads—in the past 12 years.

And each manager has put his or her own spin on the underlying investment style, forcing the endowment to switch gears every few years.

For example, Mohamed El-Erian, who briefly ran the endowment before leaving to become CEO and co-chief investment officer at PIMCO, increased the endowment’s use of derivatives and hedge funds and exposure to the emerging markets. El-Erian’s successor Jane Mendillo then took the fund in a more traditional direction. But she had the unenviable job of unwinding HMC’s exposure to El-Erian’s illiquid bets during the global financial crisis.

Every time the endowment deploys new strategies and unwinds old ones, turnover rises. And high portfolio turnover usually leads to poor performance, higher costs, and more taxes.

#3) Don’t try to copy other investors. Success is hard to replicate.

Under both Stephen Blythe, who served for less than a year and a half before taking medical leave, and interim CEO Ettl, Harvard Management has shifted a greater portion of its equity strategy to external managers—in apparent emulation of Yale.Narvekar himself is said to be closer to Yale’s Swensen, operating a relatively small staff that relies exclusively on external managers.

But it’s hard enough for successful managers to replicate their own success. It’s doubly hard trying to emulate other successful investors.

In fact, David Swensen at Yale is on record as saying that individual investors should not even try to copy what Yale is doing with its endowment.

Instead, Swensen tells investors to keep things simple by establishing a broadly diversified portfolio and then using low-cost, low-turnover index funds as vehicles of choice.

Ironically, some investment managers argue that this is a strategy that Harvard’s endowment should focus on as well.

While Harvard’s endowment has beaten the broad stock and bond markets over the past 15 years, on a risk-adjusted basis, it has actually done no better than a basic 60% stock/40% bond approach.

This may explain why financial adviser Barry Ritholtz has argued that rather than trying to emulate the Yale Model, Harvard should be taking a page from Calpers, the giant pension fund manager that invests on behalf of California’s public employees.

A couple of years ago, Calpers made a big splash by saying that it would be cutting back on its use of expensive actively managed strategies, including hedge funds, while focusing more on low-cost index funds, which simply buy and hold all the securities in a given market.

Now those are lessons—low costs, index funds, and buy and hold—that apply to your 401(k) as much as they do to Harvard’s endowment.
Great advice, right? Wrong!! The next ten years will look nothing like the last ten years.

In fact, in their latest report (it was a video update), "A Recipe For Investment Insomnia," Francois Trahan and Michael Kantrowicz of Cornerstone Macro cite ten reasons why markets are about to get a lot harder going forward :
  1. Growth Is Likely To Slow ... From Already Low Levels
  2. The Risks Of Zero Growth Are Higher Today Than In The Past
  3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
  4. The World Is Battling Lingering Structural Problems
  5. A U.S. Slowdown Has Implications For The World's Weakest Links
  6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
  7. Demographic Trends In Japan ... An Insurmountable Problem?
  8. Central Banks Have Reached The Limits Of Monetary Policy
  9. Slower Growth Is The Enemy Of Portfolio Managers
  10. P/Es Are Hypersensitive To The Economy At This Time
Also, Suzanne Woodley of Bloomberg notes this in her recent article, The Next 10 Years Will Be Ugly for Your 401(k):
It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. Their average annualized long-term expected return? 6.2 percent. After 1.6 percent was shaved off to allow for a decade of inflation1, the number dropped to 4.6 percent, which was rounded up. Voilà.

So on average we all expect a 5 percent; the report tells us we should start getting used to disappointment. To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model, the report looks at the typical balanced portfolio of 60 percent stocks and 40 percent bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance of 6.6 percent, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.

“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”

Research Affiliates’ forecasts for the stock market rely on the cyclically adjusted price-earnings ratio, known as the CAPE or Shiller P/E. It looks at P/Es over 10 years, rather than one, to account for volatility and short-term considerations, among other things.

The firm’s website lets people enter their portfolio’s asset allocation into an interactive calculator and see what their own odds are, as well as how their portfolio might fare if invested in less-mainstream assets (which the company tends to specialize in). The point isn’t to steer people to higher risk, according to West. To get higher returns, you have to take on what the firm calls “maverick” risk, and that means holding a portfolio that can look very different from those of peers. “It’s hard to stick with being wrong and alone in the short term,” West said.

At least as hard though is seeing the level of return the calculator spits out for traditional asset classes. Splitting a portfolio evenly among U.S. large-cap equities, U.S. small-cap equities, emerging-market equities, short-term U.S. Treasuries, and a global core bond portfolio produced an expected return of 2.3 percent. Taking 20 percent out of short-term U.S. Treasuries and putting 10 percent of that into emerging-market currencies, and 10 percent into U.S. Treasury Inflation Protected Securities, lifted the return to 2.7 percent. Shifting the 20 percent U.S. large-cap chunk into 10 percent commodities and 10 percent high-yield pushed the expected return up to 2.9 percent. Not a pretty picture.

Moral of the story: Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.
I've long warned my readers to prepare for a long bout of debt deflation, low and mediocre returns, and high volatility in the stock, bond and currency markets.

If you think buying index funds or using robo-advisors will solve your problems, you're in for a rude awakening. No doubt, there is a crisis in active management, but there will always be a need to find outperforming fund managers, especially if a long bear market persists.

All this to say that I take all these articles with a shaker of salt. That "one-man phenom" in Nevada was very lucky that the beta winds were blowing his way during the last ten years.

Luck is totally under-appreciated when considering long-term or short-term performance. For example, I read an article in the Wall Street Journal, King of Pain: Fund manager is No. 1 with a 40.5% gain, discussing how Aegis Value’s Scott Barbee survived tough times, wins our contest easily with 12-month skyrocket.

When I drilled into his latest holdings, I noticed almost half the portfolio is in Basic Materials and Energy, and his top holdings include WPX Energy (WPX), Coeur Mining (CDE) and Cloud Peak Energy (CLD), all stocks that got whacked hard in January and came roaring back to triple or more since then.

This transformed Scott Barbee from a zero into a hero but does this mean he will be able to repeat his stellar 12-month returns? Of course not, to even think so is ridiculous (in fact, I recommend he books his profits fast and exits energy and basic materials altogether).

I'm telling you there is so much hype out there and caught in the crosswinds are retail and institutional investors who quite frankly don't understand the macro environment and the structural changes taking place in the world which will necessarily mean lower and volatile returns are here to stay.

The lessons for Harvard endowment is don't pay attention to Nicholas Vardy, Barry Ritholtz or any other so-called expert. They all don't have a clue of what they're talking about.

As far as replicating the Yale endowment, I think it makes sense to spend a lot more time understanding the macro environment and strategic and tactical allocation decisions, and this is definitely something David Swensen and his small team do exceptionally well (Swensen wrote the book on pioneering portfolio management and he is an exceptional economist who was very close to the late James Tobin, a Nobel laureate and long-time professor of economics at Yale).

But Harvard's endowment  doesn't need advice from anyone or to replicate anyone, it has exceptionally bright people working there and their new CEO will need to figure out how to manage this fund by capitalizing on the internal talent and only farming out assets when necessary.

The articles above, however, confirmed my suspicions that several past investment officers got away with huge bonuses that they didn't really deserve based on the performance of the fund and certain sub asset classes, like natural resources.

On LinkedIn, I had an exchange with one individual who wrote this after reading my last comment on Harvard's endowment criticizing the benchmarks they were using for their real assets:
This issue is even more critical especially for pensions and endowments which invest more directly into real assets which are typically held for the long-term (not divested yet) as their bonuses tend to be annually paid out based on these real assets' valuations (which are marked-to-model), hence, can be subject to massage or manipulation if their fiduciary awareness and governance are not deep, etc...
To which I replied:
[...] keep this in mind, pensions have a much longer investment horizon than endowments and they have structural advantages over them and other investment funds to invest in private equity, real estate and increasingly in infrastructure. If they have the skill set to invest directly, all the better as it saves on costs of farming out these assets. Now, in terms of benchmarks governing these private market assets, there is no perfect solution but clearly some form of opportunity cost and spread (to adjust for illiquidity and leverage) is required to evaluate them over a long period but even that is not perfect. Pensions and endowments recognize the need to find better benchmarks for private markets and clearly some are doing a much better job than others on benchmarking these assets. The performance of these investments should be judged over a longer period and in my opinion, clawbacks should be implemented if some investment officer took huge risks to beat their benchmark and got away with millions in bonuses right before these investments plummeted.
Let me give you an example. Let's say Joe Smith worked at a big Canadian pension fund and took huge opportunistic risks to handily beat his bogus real estate benchmark and this was working, netting him and his team big bonuses right before the 2008 crisis hit.

And then when the crisis hit, the real estate portfolio got whacked hard, down close to 20%. Does this make Joe Smith a great real estate investor? Of course not, he was lucky, took big risks with other people's money and got away with millions in bonuses and had the foresight to leave that pension before the crisis hit.

Legally, Joe Smith did nothing wrong, he beat his benchmark over a rolling four-year period, but he was incentivized to game his benchmark and it was up to the board to understand the risks he was taking to handily beat his benchmark.

Here I discuss real estate but the same goes for all investment portfolios across public and private markets. People should be compensated for taking intelligent risks, not for gaming their benchmark, period.

Below, an older guest lecture (2011) from David Swensen to Yale's finance students. For me, the interesting discussion comes around minute 30 when he quotes Keynes to explain why retail and institutional investors "systematically made perverse decisions as to when to invest and when to dis-invest" from mutual funds and other investments (in layman terms, they systematically buy high and sell low).

This is a great lecture, well worth listening to as he delves into very interesting topics including why benchmarking venture capital is very difficult and why bonds are great diversifers.

I'd love to interview David Swensen now to see his thoughts on the elusive search for alpha, whether there is a giant ETF beta bubble brewing and whether Yale's endowment is bracing for a violent shift in markets.

Anyways, this is a great lecture, take the time to listen to his insights.

Friday, October 28, 2016

Harvard's 'Lazy, Fat, Stupid' Endowment?

Michael McDonald of Bloomberg reports, Harvard Called ‘Lazy, Fat, Stupid’ in Endowment Report Last Year (h/t, Johnny Quigley):
Harvard University’s money managers collected tens of millions in bonuses by exceeding “easy-to-beat” investment goals even as the college’s endowment languished, employees complained in an internal review.

The consulting firm McKinsey & Co., in a wide-ranging examination, zeroed in on the endowment’s benchmarks, or investment targets. Some of those surveyed said Harvard allowed a kind of grade inflation when it came to evaluating its money managers.

“This is the only place I’ve seen where people can negotiate the benchmark they get compensated on,” read a “representative quote" in the McKinsey report.

The McKinsey assessment offered an explanation of what it called the “performance paradox” at Harvard’s $35.7 billion endowment, the largest in higher education. Year after year, Harvard would report benchmark-beating performance while falling further behind rivals such as Yale, Princeton, Columbia and the Massachusetts Institute of Technology.

The April 2015 report, which has never been made public, spells out why the fund paid more than peers for lagging performance, as well as its management’s strategy for shifting course. Harvard said it has since revamped its compensation.

Soaring Pay

McKinsey’s review took a rare, unvarnished look into the culture of a secretive organization, where employees and others complained to McKinsey of an inattentive board and complacent culture -- in their words, “stable, rather than smart, capital” or, less charitably, “lazy, fat and stupid.”

As Harvard’s Cambridge, Massachusetts campus braces for possible budget cuts after a recent decline in the endowment, McKinsey’s conclusions are likely to raise concern. For years, faculty and alumni have complained about money manager pay, which they have called inappropriate for a nonprofit.

The consultant’s report focused on the five years ended June 2014, a period when manager compensation soared. During that half-decade, Harvard paid 11 money managers a total of $242 million, 90 percent of which was made up of bonuses, tax filings show. In the final year, total compensation amounted to $65 million, more than twice the amount five years earlier.

Harvard’s endowment has “redesigned its compensation to further align the interest of investment professionals with those of the university,” spokeswoman Emily Guadagnoli said in an e-mail. Because of under-performance in the most recent year, “current and former employees will forfeit compensation that was held back in prior years.”

The new plan ties pay to “appropriate industry benchmarks” and a “significant portion” is held back and won’t be awarded for performance that isn’t sustained, she said.

In the report, the consultants cited a “representative” quote from within the endowment stating that benchmarks are “easy to beat, inconsistent and often manipulated.” McKinsey summed up this sentiment in a PowerPoint slide: “The benchmarks are considered ‘slow rabbits.”’

People familiar with the report said some at Harvard considered McKinsey’s comparisons unfair because each school had such a different mix of investments and risks. They also took issue with the idea that benchmarks were manipulated.

Then Chief Executive Officer Jane Mendillo, who oversaw the endowment during the period McKinsey studied, had a goal of making the endowment less volatile after steep losses during the 2008 financial crisis. Even adjusted for risk, however, Harvard’s performance lagged, McKinsey said. Mendillo declined to comment.

Key Targets

Universities and other organizations with money managers must strike a balance when setting performance targets, according to Ashby Monk, who directs a Stanford University research center and is a senior adviser to the University of California endowment. Setting goals too high encourages excessive risk, while setting them too low results in overpaying money managers, he said.

“You’ve got to get the benchmarks right,” Monk said.

Harvard commissioned the study after it promoted Stephen Blyth, a former Deutsche Bank AG bond trader from head of public markets to chief executive officer in 2014. McKinsey delivered a 78-page PowerPoint presentation, which was reviewed by Bloomberg, to executives and money managers.

Afterward, Blyth overhauled Harvard’s compensation and benchmarks, making targets harder to beat. Blyth stepped down in July after taking a medical leave. In December Nirmal P. Narvekar, the top-performing endowment manager from Columbia, will take over at Harvard. He will become the eighth permanent or interim chief executive since 2005.

Foregone Billions

In the five years scrutinized by McKinsey, the fund reported an average annual return of 11.2 percent, compared with Princeton’s 14 percent, Yale’s 13.5 percent and MIT’s 13.2 percent. Harvard’s relative under-performance cost the school $3.5 billion. Because of such results, McKinsey warned that Harvard could lose its perch as the world’s largest endowment to Yale within 20 years. On a 10-year basis, Harvard’s performance was “slightly better,” McKinsey said.

The review focused on what endowments call a “policy portfolio.” It reflects the mix of each kind of asset a school owns -- from stocks and bonds to South American timberland. The university picks benchmarks, such as an equity index, to evaluate the performance of the different investments.

Over the five-year period, Harvard reported that its 11.2 percent average annual return beat its benchmarks -- its so-called policy portfolio -- by 1 percentage point, a significant margin for a money manager.

Then, McKinsey compared the college’s performance to Stanford’s policy portfolio, which it viewed as more ambitious. Had it been measured by the more rigorous standard, Harvard would have underperformed by half a percentage point.

Side Deals

In fact, merely running a portfolio of index-tracking funds -– 65 percent in the S&P 500 Index and 35 percent in a government bond index -– would have generated a 14.2 percent annual return.

During the financial crisis, managers took steps to move out poorly performing investments and adjust benchmarks, muddying performance judgments, according to one of the quotations from the survey: “There were so many side deals cut during the crisis – bad stuff moved out of portfolios and benchmarks adjusted – individual performance bears little resemblance to fund performance and we somehow seem OK with that.”

The McKinsey report singled out alternative investments such as real estate and natural resources. They make up more than half of Harvard’s portfolio, and McKinsey noted they performed strongly. At the same time, they were judged on benchmarks -- particularly for natural resources -- that were “less aggressive” compared with those at Yale, Princeton and Stanford, according to the report.

Highest Pay

In the five-year period, the university paid Andrew Wiltshire, who oversaw alternative investments, a total of $38 million, more than anyone else. Alvaro Aguirre, who oversaw holdings in natural resources like farmland and timber, made $25 million during the four years for which his compensation was disclosed. Wiltshire, who declined to comment, and Aguirre, who didn’t return messages, both left Harvard last year.

During the entire five years, Harvard paid then CEO Mendillo $37 million, twice as much as top-performing David Swensen at Yale University.

The report recommended expanding Harvard’s internal trading operations, which it said had an annual cost of almost $75 million, including performance bonuses for employees. Harvard did so, but later backtracked, eliminating at least a dozen positions.

Thanking Klarman

Blyth, who headed public markets, including the trading operation, was paid a total of $34 million over the five years. McKinsey found that Blyth’s unit contribute strongly to the fund’s performance, and its benchmarks fell in line with the school’s peers. Blyth didn’t return messages.

The report also noted that some of the best-performing investments in the portfolio were picked years ago. They included Baupost Group LLC, the hedge fund run by Seth Klarman, stock-picking hedge fund Adage Capital Management, and venture firm Sequoia Capital, an early backer of Google and PayPal Holdings Inc. “Thank God for Seth Klarman,” one employee told the consultants.

McKinsey cited interviews describing recent commitments to strongly performing investments, such as Baker Brothers Advisors, a biotechnology stock-focused fund, as “incremental, scattershot and lacking in conviction.”

Consultants heard complaints about the board overseeing Harvard Management Co., the school’s investment arm: “The board doesn’t ask the hard, searching questions around benchmarks and compensation.”

Falling Behind

James Rothenberg, chairman of Capital Research & Management Co., the Los Angeles mutual-fund manager, chaired the board during this period. Rothenberg, who was also Harvard’s treasurer, died in July 2015.

Paul Finnegan, founder of a private equity fund, joined the board in 2014 and succeeded Rothenberg as chairman last year. Most of the current members of the board joined in the last two years. Harvard President Drew Faust was also on the board during the period and remains a member.

McKinsey said staffers were proud to work for such a prestigious college, which they said could use its name to attract talent and gain access to investments. As one of those interviewed told the consultant: “Harvard shouldn’t stand for mediocrity, but that’s where we’re heading if this continues.”
Ah, the trials and tribulations of Harvard's mighty endowment fund. Once renowned for its investment prowess, now it's being heavily criticized for overpaying investment officers who "manipulated" their benchmarks to make it look as if they were adding more value than they actually did.

What is the connection to pensions and why cover this article on my blog when I should be covering markets on a Friday? Quite a bit because this story sounds a few alarm bells for all endowment funds, pension funds, hedge funds, private equity funds, and mutual funds.

Last Friday, I covered the elusive search for alpha, where I warned investors not to read too much into the latest performance of established or less well-known hedge funds and private equity funds, even if they are performing exceptionally well.

Now we read that Harvard's mighty endowment has some real serious issues to contend with. What are my thoughts and what is the link to pensions? I will try to be short and sweet:
  • First, whenever you hear the board or senior management is hiring McKinsey, Boston Consulting Group, or some other big name consultant, brace yourselves, bad news is coming. I'd love to see the 78-page PowerPoint presentation to Harvard endowment's board and I am sure Canada's large pension funds would love to see it too.
  • Second, I actually welcome this McKinsey study and think it or another consulting group should provide a similar study to the Auditor General of Canada and provincial auditor generals reviewing all the benchmarks used across public and private markets at Canada's large pensions, the leverage they take to achieve their results, and whether they're all adding the value they claim when adjusting for illiquidity, leverage, and other factors. I recently praised Canada's new masters of the universe but I also noted that oversight and governance needs to be improved by commissioning independent, comprehensive assessments of operational, investment and risk management risks (and these reports should be made public).
  • Third, related to second point, not all boards are created equal. Some are doing a much better job than others overseeing the operations of the endowments and pensions they are responsible for. I'm not claiming the board members at Harvard or any of Canada's large pensions are incompetent as they clearly aren't, but they need to fulfill their fiduciary duty and make sure there is nothing remotely shady going on, especially when it comes to benchmarking performance which is used to gauge performance and determine compensation. 
  • Fourth, the compensation at Harvard's endowment is mind-blowing, not only by Canadian pension standards, but also relative to other large US endowments. When I read that during the entire five years, Harvard paid then CEO Mendillo $37 million, twice as much as top-performing David Swensen at Yale University, I was floored. I believe in paying for real performance (adjusted for risk) and this was clearly not the case at Harvard. Moreover, when you read the absurd compensation at Harvard's endowment, you wonder what are they smoking? If these "investment superstars' are that great, why aren't they opening up their own hedge fund or private equity fund to make some serious money? Also, I openly question whether on a risk-adjusted basis Canada's top large pensions are not outperforming some of the large US endowments. If that's the case, we can argue that Canada's senior pension investment officers are a real bargain (I'm serious!). 
  • Fifth, I wrote a comment on Harvard betting on farmland back in 2012,  stating that "Harvard's push into timberland was not revolutionary" and it was fraught with risks. I'm extremely surprised that Alvaro Aguirre, who oversaw holdings in natural resources like farmland and timber, made $25 million during the four years for which his compensation was disclosed. That is outrageous and absurd and I wonder how well these investments are doing nowadays after the bubble in agriculture burst (I've seen mixed performance figures and some bombs from big pensions like CalPERS).
  • Sixth, I don't know what happened to Stephen Blyth, I hope his medical leave of absence isn't serious, but he seemed to me to be the most qualified CEO and his internal trading group was delivering stellar results. Last September, Harvard's endowment was warning of market froth and Blyth was actively looking for investment managers with expertise as short-sellers. His timing might have been off by a year and even now, I am not sure we should be bracing for a violent shift in markets.
  • Seventh, take all this stuff about "Thank God for Seth Klarman" with a shaker of salt! I admire Klarman, his protege, David Abrams, the one-man wealth machine, and many other top funds Harvard's endowment has invested in, including Adage Capital and the Baker Brothers. I track their holdings as well as those of other top funds every quarter on my blog. But these are tough markets for everyone, especially for biotech investors like the Baker Bros (I know, I trade biotechs and they swing like crazy both ways). It is also interesting to note that Klarman and Abrams hold some big positions in biotechs that got massacred recently so I am not sure how they are performing lately (remember, don't fall in love with your managers, grill them, that is your job!).  
Lastly, I don't know much about Harvard endowment's new CEO, Nirmal P. “Narv” Narvekar, but he has excellent credentials and did an outstanding job at Columbia University’s $9.6 billion endowment fund since 2002. I'm sure Harvard is paying him a bundle to run its endowment.

Still, expectations run much higher at Harvard and he has a very tough job ahead to transform this mighty endowment fund for the better. Will he be Harvard's answer to David Swensen? I strongly doubt it but let's give the man a chance to prove his worth over the next two or three years.

That's the other problem with these large US endowments, too much focus on short-term performance, expectations run unrealistically high given that we live in a deflationary world where the elusive search for alpha is becoming harder and harder. That goes for all investment managers.

On that note, I was a bit disappointed today when Opexa Therapeutics (OPXA) announced that the Phase 2b Abili-T clinical trial designed to evaluate the efficacy and safety of Tcelna in patients with secondary progressive multiple sclerosis (SPMS) did not meet its primary endpoint of reduction in brain volume change (atrophy), nor did it meet the secondary endpoint of reduction of the rate of sustained disease progression. Tcelna did show a favorable safety and tolerability profile.

I took part in that study and given there are no side-effects whatsoever, I still don't know if I was on the medication or placebo. All I know is that I'm feeling much better, doing well, but for thousands of patients with secondary progressive multiple sclerosis (SPMS), the elusive search for a cure or well tolerated treatment (with no nasty side-effects like PML) goes on. There are new treatments on the way but much more needs to be done to tackle the needs of patients with secondary or primary progressive MS.

But like I tell my family and friends, the best way to tackle MS or any chronic disease is through diet, exercise, vitamin D and a positive mindset (see my links on fighting MS on the bottom right-hand side).

But just like in investments, luck plays a factor in all diseases so try not to beat yourself silly if things aren't going well and just count your blessings when they are.

That reminds me, I have to get my "lazy, fat, stupid" ass in the gym and do a little workout to decompress, it's been a rough week trading biotech stocks (click on image):

Thank God I wasn't invested in Opexa, it took a massive 70% haircut today following the bad news (taking stock specific risks in biotech is extremely risky!!).

But I think this latest biotech selloff presents great opportunities and smart traders and investors are loading up here (regardless of who wins on November 8th, I would be buying the dip on the IBB and especially the XBI).

Hope you enjoyed reading this comment, as always, I don't claim to have a monopoly of wisdom on pensions and investments, so if you want to add your insights, feel free to shoot me an email at

Also, please remember to kindly contribute to this blog on the right-hand side via PayPal. The comments are free but I appreciate your support and thank those of you who value my work. Better yet, please donate to the Montreal Neurological Institute here and support their research.

Below, Harvard University’s money managers collected tens of millions in bonuses by exceeding “easy-to-beat” investment goals even as the college’s endowment languished. Bloomberg's Michael McDonald reports. Bloomberg should disable autoplay in their clips; if it autoplays, follow these steps to disable it on your browser (I know, the music is lame but the advice is sound).

Also, Raoul Pal, who co-managed the GLG Global Macro Fund in London for GLG Partners and retired at 36 in 2004, explains why people in the hedge fund industry are "fed up" and warns others to stay away. You can watch this interview here.

Pal cites the pressure of short-term investing as one of the reasons why he left the hedge fund industry. He also talks about his new venture to "democratize" investing, to level the playing field for everyone.

After delivering a 35-page PowerPoint presentation on robo-advisors this week to a FinTech company, I take all this talk of "democratizing finance" with a shaker, not a grain of salt. There's a lot of hype out there, period.

As far as entering hedge funds, I wrote a tongue-in-cheek comment three years ago, So You Wanna Start a Hedge Fund?, where I warned all Soros wannabes to stay away and follow the wise advice of Andrew Lahde, the best hedge fund manager you probably never heard of (Michael Lewis didn't write about him in The Big Short, just like he didn't write about Haim Bodek in Flash Boys).

At the end of the day, what counts the most is your health and peace of mind, keep that in mind as you try to "deliver alpha" (aka, leveraged beta) in an increasingly difficult environment. Enjoy your weekend!

Thursday, October 27, 2016

Liberals Attack on Public Pensions?

The Public Service Alliance of Canada (PSAC) put out a press release, Liberal bill an attack on pensions:
The Liberal government is following the Conservatives’ lead by introducing legislation that will allow employers to reduce pension benefits.

Bill C-27, An Act to amend the Pension Benefits Standards Act, had its first reading in the House of Commons last week.
A target benefit pension plan is a big gamble

This bill will allow employers to shift from good, defined benefit plans that provide secure and predictable pension benefits, into the much less secure form of target benefits.

Unlike a defined benefit plan, where the employer and employees contribute and retirees know how much they can expect when they retire, the amount you receive under a target benefit pension plan is just that, a target. Meaning, the plan aims to give you a certain pension benefit, but there’s no guarantee.

The other big difference is that target pension benefit plans shift the financial risk from the employer to employees and pensioners.
PSAC will oppose this bill

Bill C-27 opens the door to eliminating or reducing defined benefit pension plans. PSAC has opposed target benefit pension plans since the previous Conservative government introduced consultations.

We will continue to resist any move in this direction, and continue to push for retirement security for all Canadians.
A PSAC union member brought this to my attention, providing me with some context:
Bill C-27 was introduced in the Parliament of Canada on October 19th, 2016 and will allow for the conversion of defined benefit pension plans to less secure "target benefit" pension plans. Quite remarkably this legislation has thus far been flying under the mainstream media radar.

In the opinion of the PSAC, Bill C-27 will eventually lead to the demise of "defined benefit" pension plans in the federal jurisdiction and is a component of the Morneau agenda to dismantle the Public Service Superannuation Act.
To say the least, I was shocked when I read this and replied: "Wow, interesting, I thought only the Harper government would try to pull off such sneaky, underhanded things. Hello Trudeau Liberals!" (at least Harper wore his colors on his sleeve when it came to pensions and his government did introduce cuts to MP pensions).

It never ceases to amaze me how politicians can act like slimy weasels regardless of their political affiliation. If Bill C-27 passes to amend the Pension Benefits Standards Act, it will significantly undermine public pensions of PSAC's members and they are absolutely right to vigorously oppose it.

Who cares if the pensions of civil servants are reduced or shifted to target benefit plans? I care and let me state this, this bill is a farce, a complete and utter disgrace and totally incompatible with the recent policy shift to enhance the Canada Pension Plan (CPP) for all Canadians.

Think about it, on the one hand the Trudeau Liberals worked hard to pass legislation to bolster the Canada Pension Plan and on the other, they are introducing an amendment to the Pension Benefits Standards Act which will open the door to eliminating or reducing defined-benefit plans at the public sector.

The irony is that PSAC's members helped the Trudeau Liberals sweep into power and this is how they are being treated? With friends like that, who needs enemies?

More importantly, there is no need to amend the Pension Benefits Standards Act to introduce target pension benefit plans because these pensions are safe and secure and managed properly at arms-length from the federal government at PSP Investments.

[Note: I can just imagine what the folks at PSP think of Bill C-27, something like "what the hell is the federal government trying to do here?!?"].

And let me repeat something, just like variable benefit plans which I covered in my last comment, target date benefit plans offer some interesting ways to help people invest properly for retirement, but they too suffer from the same deficiencies of defined-contribution plans because they invest solely in public markets and offer no guarantees whatsoever.

In fact, John Authers of the Financial Times wrote an article on this in the summer, Target-dated funds are welcome but no panacea for pension holes:
Much is riding on target-dated funds. As this week’s FT series on pensions should make clear, defined benefit pensions face serious deficits — but the same mathematics of disappointing returns and ever greater expense for buying an income also applies to defined contribution plans.

DC plans have been poorly designed. For years, 401(k) sponsors were lulled by the equity bull market into allowing members to choose their own asset allocations, and switch between funds and asset classes at will. This was a recipe for disaster, as members tended to sell at the bottom and buy at the top. The strong returns of the 1990s convinced many that they could get away with saving far less than they needed.

The industry and regulators have been alive to the problem, and their response is sensible. Now they offer a default option of a fund that aims to ensure a decent payout by a “target date” — the intended retirement date. These funds automatically adjust their asset allocation between stocks and bonds as the retirement date approaches, which in general means starting with mostly stocks and shifting to bonds as retirement approaches. This (good) idea mimics the best features of a DB plan.

Such funds are undeniably an improvement on the “supermarket” model of the 1990s. Savers avoid the pitfalls of taking too much or too little risk, and regular rebalancing helps them sell at the top and buy at the bottom.

But TDFs have problems, which are growing increasingly apparent. First, are their costs under control? Second, do they have their asset allocation right? And third, can we benchmark their performance?

On costs, the news is good. US regulations require 401(k) sponsors to look at costs, and the response has been to drive down fees. According to Morningstar’s Jeff Holt, TDFs’ average asset-weighted expense ratio stood at 1.03 per cent in 2009, and by last year had dropped to 0.73 per cent — a 30 basis point fall, which in a low return environment could make a very big difference when compounded.

But if TDFs are coming under pressure to limit costs, the pressure over asset allocation is taking them in every direction. They are designed as mutual funds, so they still do not hold the kind of illiquid assets that the best DB funds can fund, such as infrastructure. That is a problem.

So is the entire balance between stocks and bonds. The notion from the DB world was to reach 100 per cent bonds by the retirement date, when the fund could be used to buy an annuity. With low bond yields making annuities expensive, and life expectancy far longer than it used to be, this no longer makes much sense. A 65-year-old, with a decent chance of making it to 90, should not be 100 per cent invested in bonds.

But high equity allocations tend to emphasise that the TDFs expose savers to greater risk than a DB plan. According to Morningstar the average drawdown for 2010 TDFs during the crisis year of 2008 was 36 per cent — a potentially disastrous loss of capital for people about to retire. As stocks rapidly recovered, and as those retiring in 2010 would have been unwise to sell all their stocks, this should not be a problem — but it plainly hit confidence.

The early stages are also a problem. Our 20s and 30s are a time of great expense. Should young investors really be defaulted into heavy equity holdings when the risks that they lose their job are still high, and when they face possible big drains on their income, such as a baby, or downpayments on a first house?

So the “glide path” of shifting from equity to bonds is controversial. And there is no standard practice on it. According to Mr Holt, TDFs’ holdings of bonds at the target date for retirement vary from 10 to 70 per cent.

What about benchmarking? Such differences make it impossible. Asset allocation differences swamp other factors, and are driven by different assumptions about risk.

Establish bands for asset allocation at each age, but allow them to vary according to valuation. Funds designed for retirement should never take the risk of being out of the market altogether. But if, as now, bonds and US equities look overpriced while emerging market equities look cheap, an approach that took US equities’ weighting to the bottom of its band, while putting the maximum permissible into emerging markets, would probably work out well.

There is not, as yet, an incentive to do that, and there needs to be. TDFs, or something like them, should be at the heart of future pension provision. It is good that their costs are under control, but there are ways to make them far more effective: by allowing more asset classes, accepting that people at retirement should still have substantial holdings in equities, and encouraging TDFs to allocate more to asset classes that are cheap.
I agree with Authers, there are ways to make target-dated funds more effective and folks like Ron Surz, President of Target Date Solutions are at the forefront of such initiatives.

But no matter how effective they get, target-dated pensions or variable benefit plans will never match the effectiveness of an Ontario Teachers, HOOPP, Caisse, CPPIB, PSP Investments and other large, well-governed Canadian defined-benefit pensions which reduce costs, address longevity risk (so members never outlive their savings) and invest across public and private markets all over the world, mostly directly and through top funds.

All this to say that PSAC is right to vigorously oppose Bill C-27, it's a total assault on their defined-benefit pensions, and if passed, this amendment will undermine their pensions, the ability of the civil service to attract qualified people to work for the federal and other governments, and the Canadian economy.

In short, it's dumb pension policy and if Trudeau thinks he had a tough time in the boxing ring, let him try to pull this off, it will basically spell the end of his political career (this and the asinine housing market policies won't help the Liberals' good fortunes).

Stay tuned, more to come on this topic from other pension experts. I will update this comment as experts send in their views and if anyone has anything to add, feel free to reach me at

Update: Jim Leech, the former president and CEO of the Ontario Teachers' Pension Plan and co-author of The Third Rail, shared this with me (added emphasis is mine):
I think everyone is missing the point of this bill.

Until now, federal pension legislation has only recognized plans as either DC or DB - there was no provision for a hybrid/risk shared plan.

That is one reason contributing to the switch all the way from DB to DC at many companies - if the DB plan was not sustainable, the only alternative was to move all the way to DC - a middle ground was not available even if the parties wanted a middle ground.

As I understand it, this bill simply allows transition to a risk shared model as an alternative to closing the DB and going all the way to DC.

Greater legislative flexibility is a positive step.
While I agree with Jim, some form of a shared risk model like the one New Brunswick implemented makes perfect sense for all public pension plans, especially if they are grossly underfunded, I'm not convinced the federal government needs to introduce hybrid plans at this stage and share PSAC's concern that this amendment opens the door to cutting DB pensions altogether.

Also, Bernard Dussault, Canada's former Chief Actuary, shared these insights with me (added emphasis is mine):
There are two big fairness-related points with this legislation, namely:
  • not only does it allow the reduction of future accruing pension benefits of both active and retired (deferred and pensioned) members, a vital right so far covered under federal and provincial (except NB since 2014) pension legislation;
  • but it also allows the concerned sponsoring employers to shift to active and retired members the liability pertaining to any current (as at effective date of the tabled C-27 legislation) deficit under any concerned existing DB plan.
As shown in the two attachments hereto, I have been promoting over the past few years that the shortcomings of DB plans can be easily overcome in a manner that would make DB plans much more simple, effective and fair than TB plans. Points not to be missed.
One of the attachments Bernard shared with me, Improving Defined Benefit (DB) plans within the Canadian Pension Landscape, is available here. I thank Bernard and Jim for sharing these insights.

Wednesday, October 26, 2016

The Future of Retirement Plans?

Lee Barney of Plan Sponsor reports, A Pension Plan That Makes No Promises (h/t, Suzanne Bishopric):
Variable benefit plans are a type of defined benefit (DB) plan that have been around for decades, according to Matt Klein, a principal and leader of the actuarial services practice at employee benefits consulting firm Findley Davies in Cleveland.

However, few sponsors and retirement plan advisers know about them, he says, estimating that there are fewer than 100 of these types of plans in the United States. Nonetheless, he believes that sponsors and retirement plan advisers might be interested in them since they shift the investment risk off of the sponsor’s shoulders onto the participant’s—while moving the longevity risk over to the sponsor.

Employers continue to shut down their pension plans, redeploying their employees into defined contribution (DC) plans, Klein notes. But unless participants are automatically enrolled into their DC plan at meaningful deferral rates into an appropriate qualified default investment alternative (QDIA), most DC participants fail to make appropriate investment and deferral decisions, he says. The DC system fails to properly prepare most people for retirement, he maintains.

A variable benefit plan is a type of pension plan that, unlike a traditional DB plan that promises a set return every year, fluctuates with the market, he explains. Hence the name variable benefit.

“Sponsors interested in a comprehensive benefits package that will be able to provide employees with a comfortable retirement might want to consider a variable benefits plan, which eliminates the traditional risks associated with defined benefit plans and provides a stable cost and contribution policy that fits better with companies’ goals and objective in the 21st century,” Klein says.

NEXT: Comparison to traditional DB plans

In a traditional DB plan, the employer takes on the investment risk, he explains. But when a pension plan faces a market correction, such as the 2008 financial crises, assets decrease significantly while participants’ promised benefits remain intact, requiring the sponsor to make additional contributions to fund the plan at the precise time when they are typically facing a recession, Klein notes.

Like a traditional DB plans, a variable benefit plan uses an accrual rate whereby the sponsor contributes a percentage of each participant’s salary to the plan each year and ensures that the assets are professionally managed. Unlike a traditional DB plan, however, a variable benefit plan establishes a hurdle rate, which is the percentage return goal for each year, Klein says. If the returns are actually higher than the hurdle rate, the sponsor can increase the participants’ benefits—but if it is lower, they can reduce the benefits, Klein says.

“You would invest the assets in a variable benefit plan very differently than a traditional DB plan,” he adds. “A lot of traditional DB plans are doing some sort of asset/liability matching or glide path strategy, matching bonds to expected cash flows coming out of the plan. With a variable benefit plan, you don’t have the downside risk keeping employers up at night. One way to approach investing in a variable benefit plan is to treat it like an endowment while still being cognizant of the downside risk.”
NEXT: Advantages for participants and sponsors

From the participants’ perspective, the key advantage of a variable benefit plan is that, like a traditional DB plan, when they retire, they receive an annuity that pays them a set monthly income, as opposed to a lump sum they would receive from a DC plan or even a cash balance plan, Klein notes.

He believes that because DC plans are so prevalent today, sponsors and participants are now accustomed to variable returns—and the fact that their balances could decrease—and that they might be more receptive to variable benefit plans.

“Part of my passion here is to try and educate employers and advisers that these plans do exist,” he says. “They meet all of the legal hurdles and requirements of the IRS, DOL and ERISA. They are a win/win for both plan sponsors and plan participants while splitting the investment and longevity risks between the employer and the participant.”

An additional reason an employer might consider a variable benefit plan is that, unlike traditional pension plans that are typically underfunded and that require DB plan sponsors to pay 3% of their underfunding each year to the Pension Benefit Guaranty Corporation (PBGC), variable benefit plans remain 100% or very close to 100% funded. The reason for this is that the benefits rise or decrease as the plan’s returns exceed, meet or fall below the hurdle rate, Klein says. Therefore, variable benefit plan sponsors do not have to pay the annual 3% to the PBGC, only the minimal per-head cost.

Findley Davies has created a white paper comparing the benefits of variable benefit, DB, DC and cash balance plans, titled, “The Future of Retirement Plans: Variable Benefit Plans.” The paper makes the case that variable benefit plans strike the right balance between investment, interest or inflation, and mortality risk. It is available here.
I went through the white paper, “The Future of Retirement Plans: Variable Benefit Plans,” and found it was well written.

The paper begins with the three most significant risks to any retirement plan (click on image):

Of these, the most significant risk is the direction of interest rates, especially when rates are at historic lows. The the lower they go, the higher the liabilities shoot up relative to assets.

Why? Because the duration of liabilities is much bigger than the duration of assets, so for any given decline in interest rates, the increase in liabilities will dwarf and increase in assets.

This is especially true in a low rate environment which is why I've always warned my readers a prolonged bout of deflation will decimate many pensions which are already in deeply underfunded territory.

So how does it work? There is an example given in the white paper (click on image):

And for the active participant using the same example (click on image):

What are my thoughts? Obviously variable benefit plans are better than defined-contribution plans because they offer a monthly income for life and from an employer's perspective, they offer the added advantage they remain off the hook if the plan is underfunded as employees will bear cuts (or increases) to their benefits depending on where annual returns lie relative to the hurdle rate.

But let's not kid ourselves, while variable benefit plans offer some benefits relative to DC plans, they are still far and away inferior to a large well-governed defined-benefit plan which has adopted a shared-risk model among its stakeholders (Ontario Teachers, HOOPP, OPTrust, CAAT for example).

Basically, without going into too much detail, variable pensions suffer from the same deficiencies as DC plans, namely, they only invest in public markets and are subject to the vagaries of the stock market. Only difference is if the plan has a bad year, benefits are automatically adjusted down, which is no skin off the employer's back. There is zero risk-sharing going on here (employees assume all the risk in bad years).

Go back to read my last comment on Canada's new masters of the universe where I stated the following:
The brutal truth on defined-contribution plans is they are leaving millions at risk of pension poverty which is why unlike the Andrew Coynes of this world, I kept harping on enhancing the CPP knowing full well Canadians are getting a great bang for their CPP buck.

And when I read about what is happening to Nortel's pensioners, it infuriates me and reminds me that there is still a lot of work left to do in terms of pension policy in this country, like creating a new large, well-governed public pension here in Montreal in charge of managing the assets of all Canadian DB and DC corporate pensions (Montreal is home to the country's best corporate DB pensions like CN's Investment Division and Air Canada Pensions).
When it comes to pensions, nothing, and I mean nothing, compares to a large, well-governed DB pension which has adopted risk-sharing, typically in the form of adjusting inflation protection if the plan is underfunded, not cutting benefits every year depending on how stocks and bonds are doing.

And I would prefer if these were large well-governed public DB pensions like we have in Canada. Smaller DB pensions are struggling and I think it's high time we consolidate a lot of local and city pensions into the big ones.

Below, Milliman consultants Kelly Coffing and Grant Camp discuss some of the benefits that VAPPs offer sponsors and participants in this Milliman Hangout. Keep my comments above in mind as you listen to this discussion. VAPPs may be the future of pension plans but they are not the best solution.

Monday, October 24, 2016

Canada's New Masters of the Universe?

Theresa Tedesco and Barbara Shecter of the National Post report, Inside the risky strategy that made Canada’s biggest pension plans the new ‘masters of the universe’:
They are among the world’s most famous landlords with stakes in major airports in Europe, luxury retailers in New York and transportation hubs in South America. They rank as five of the top 30 global real estate investors, seven of the world’s biggest international infrastructure investors, and were at the table during six of the top 100 leveraged buyouts in corporate history. And they are Canadian.

The country’s eight largest public pension funds, which collectively manage net assets worth more than $1 trillion, have acquired so much heft in the past decade that they are being lauded in international financial circles as the new “masters of the universe.” Their clout has caught the attention of major Wall Street investment firms angling for their business, as well as institutional investors around the world that are emulating their investing model (click on image).

“Canada’s public-sector pension plans are high profile, widely admired and they’re certainly bigger than they used to be,” said Malcolm Hamilton, a pension expert and senior fellow at the C.D. Howe Institute in Toronto.

A veteran Bay Street denizen, who asked not to be named because his firm has business dealings with many of the funds, added: “Asset by asset, around the world by virtue of their investments through ownership or partnership, they are as much economic ambassadors for Canada as anybody.”

But the vaunted positions these pension-plan behemoths have on the world stage is attracting closer scrutiny — and some skepticism — from industry experts at home, including the Bank of Canada, because of the increased levels of risk they are taking and the potential “future vulnerability” many of them have assumed in the pursuit of growth.

“You’re seeing more and more pension funds taking on greater risk in the past 15 years,” said Peter Forsyth, a professor of computational finance specializing in risk at the University of Waterloo in Ontario.

The eight funds, which account for two-thirds of the country’s pension fund assets or 15 per cent of all assets in the Canadian financial system, are acting more like merchant banks in going after — and financing — blockbuster deals in increasingly riskier locations and asset types.

A major reason behind the pension plans’ thirst for less liquid assets, namely real estate, private equity and infrastructure — much of it in foreign places — is the low-interest-environment that has made traditional assets less desirable. Between 2007 and 2015, the big eight public pension funds’ collective allocation to these types of investments grew to 29 per cent from 21 per cent. And foreign assets jumped to account for 81.5 per cent of assets in 2015 from 25 per cent in 2007 (click on images below).

That strategy collides with their traditional image as conservative, risk-averse guardians of retirement nest eggs. Should investments go wrong, benefits would likely be slashed, contributions could be sharply increased and it is anyone’s guess who would be on the hook if there were major losses.

“On the world stage, they are the cream of the crop, but I think they are taking significant risks and they aren’t acknowledging it,” Hamilton said.

Perhaps more importantly, the pension sector in Canada lacks the same stringent cohesive regulatory oversight as banks and insurers, meaning there are less checks and balances governing a big chunk of everyone’s retirement plans. As a result, some industry participants are questioning whether public pension funds should be more closely examined.

“The pension funds are largely unregulated — what’s regulated is the payments to the beneficiaries. The investments of the pensions are not regulated,” said a veteran Bay Street risk expert who asked not to be named. “And so this is the conundrum they’re in as they move further afield … And it’s a big debate going on right now.”

With net assets ranging from $64 billion to $265 billion, the top eight pension funds — Canadian Pension Plan Investment Board (CPPIB), Caisse de depot et placement du Quebec, Ontario Teachers’ Pension Plan, British Columbia Investment Management Corp., Public Sector Pension Investment Board, Alberta Investment Management Corp., OMERS (Ontario Municipal Employees Retirement System and Healthcare of Ontario Pension Plan (HOOPP) — all rank among the 100 largest such funds in the world, and three are among the top 20, according to a study by the Boston Consulting Group released last February. Only the United States has more public pension funds on the global list.

The country’s giant public pension plans, flush with billions in retirement savings, began flexing their investment muscle on the heels of tougher banking laws following the financial crisis of 2008-2009.

Although Canada emerged as the darling in international financial circles for its resilience during the crisis and resulting recession — and the major banks basked in the glory — their global counterparts did not fare so well, which prompted policymakers to layer on additional regulation for all banks.

These new rules, many of which are contained in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, are supposed to protect the financial sector in times of stress by limiting risk-taking strategies. Canadian pension funds, unencumbered from those onerous banking rules, have been all too eager to rush in.

During the past 10 years, they have accumulated an eclectic mix of prime assets in unprecedented fashion. Among them: a 27-per-cent stake in the Port of Brisbane in Australia; interests in Porterbrook Rail, the second-largest owner and lessor of trains in the United Kingdom; luxury retailer Neiman Marcus Group in New York; Transelec, Chile’s largest electricity transmission company; Heathrow Airport; and Camelot Group, the U.K.’s national lottery operator.

In all, they’ve done 20 deals worth more than US$10 billion during that time, according to the Boston Consulting report.

It’s a deal binge that has created a “new world order” in which “Canada’s pension funds have barged Wall Street to stake a claim to be the new masters of the universe,” a British financial columnist noted last year.

Notably, the Canadian public pensions have invested in less conventional businesses and asset classes, where risks are generally higher than more conservative investments such as stocks and bonds. At the same time, there is potentially even more risk looming because the funds are pushing into asset classes and geographies where they have less experience.

For example, CPPIB in June 2015 paid $12 billion for General Electric Capital Corp.’s GE Antares Capital, a middle-market private-equity sponsor. The pension giant has also made a pair of recent investments in the insurance business.

Earlier this month, the Caisse announced plans to invest US$600 million to US$700 million over four years in stressed assets and specialized corporate credit in India. The Quebec-based pension group forged a long-term partnership with Edelweiss Asset Reconstruction Company, India’s leading specialist in stressed assets, which included taking a 20-per-cent equity stake in Edelweiss.

At the same time, the pension funds are increasingly barging in on the conventional bank business. The CPPIB, which invests on behalf of 19 million Canadians as the investment arm of the Canada Pension Plan, has started tapping public markets by issuing bonds to fund their large-scale deals rather than seek debt financing through the banks.

In June 2015, Canada’s largest public pension fund, with $287.3 billion in assets under management — and the eighth largest in the world — raised $1 billion by issuing five-year bonds. A follow-up offering of three-year notes raised an additional $1.25 billion.

“Pension funds used to stick with a balanced portfolio of public-traded debt and equities and a little real estate,” said Richard Nesbitt, chief executive of the Toronto-based Global Risk Institute in Financial Services. “The Canadian model of pension investment management invests into many more asset classes including infrastructure assets around the globe. Banks are still there providing support in the form of advice and corporate loans. But the banks tend to be more regionally focused whereas the pensions are definitely global.”

Meanwhile, Canada’s large pension funds are also borrowing more money to fund their investments. Since they have long time horizons relative to other investors — decades in some cases — they argue that gives them a competitive advantage in both the deal arena and the ability to tolerate more short-term volatility.

“The pressure has just been getting worse and worse, especially as interest rates continue to decline for public funds to get the returns they used to get,” said Hamilton, a 40-year veteran of the industry and former partner at Mercer (Canada).

Low interest rates have a double-whammy effect: they tend to boost the prices of assets and lower expected returns while at the same time reducing borrowing costs, making it cheaper to borrow money and increasing the incentive to use leverage.

But rather than cutting back their risk exposure, Hamilton said the funds, especially those pension plans that are maturing, are behaving the same way they did during the gravy days of high interest rates years 20 years ago. The reason they are behaving this way is because they can’t afford to suffer lower returns, he said, because either benefits would have to be cut or contributions to the plan raised to keep payouts the same.

“They are levering up and hoping for the best instead of making the tough choices,” Hamilton said. “There are alternatives, but they are not so pleasant.”

Forsyth said a main reason Canadian pension funds have avoided making tough choices is partly because of this country’s stellar record. Unlike the Netherlands, where the central bank forces public pension funds to cut benefits when there’s too much risk on the books, Canada has never really faced a systemic financial meltdown that would induce the government to enact such tough measures.

“There isn’t the same amount of pressure in Canada, because we didn’t have the financial blow-ups they had in other countries,” he said.

The Netherlands is one of only two countries whose pension system achieved the top grade in the prestigious annual Melbourne Mercer pension index in 2015 (the other is Denmark). Canada tied for fourth with Sweden, Finland, Switzerland, the U.K. and Chile, all of which are considered to have a “sound system” with room for improvement.

Nevertheless, Canada’s public pension system has pioneered new approaches to institutional investing and governance, and rates among the best in the world in terms of funding its public-sector pension liabilities.

The key characteristic of the Canadian model is cost savings. Canadian fund managers, unlike other public pension managers, prefer to actively manage their portfolios with teams — employing about 5,500 people (and about 11,000 when including those in the financial and real estate sectors) — an organizational style that allows them to direct about 80 per cent of their total assets in-house.

Cutting out the middleman creates considerable economies of scale by lowering average costs, especially through fees to expensive third parties such as Blackrock Inc. and KKR & Co. LP.

In private equity, for example, managers can charge a fee equal to two per cent of assets and 20 per cent of profits. Hiring internal staff and building up internal capabilities is far less expensive. So much so that the total management cost for most Canadian public funds is 0.3 per cent versus 0.4 per cent for a typical fund that relies on external managers.
[Note: I think this is a mistake, the total management cost for a typical fund that relies on external managers is much higher than 0.4%.]

The management style was pioneered by Claude Lamoureux, former head of Ontario Teachers’ Pension Plan, who was the first to adopt many of the core principles espoused by the late Peter Drucker in the early 1990s on creating better “value for money outcomes.” Now all large Canadians funds operate with these key principles.

“That’s the innovation. It’s a simple story of scale allowing you to disintermediate a distributor,” said a senior Canadian pension executive who asked not to be named.

The strategy may be simple, but it has had a significant impact on the bottom line. The cost savings have added up to hundreds of millions of dollars that have been invested rather than outsourced.

Since 2013, total assets under management for the top 10 major public pension funds have tripled, with investment returns driving 80 per cent of the increase.

Even so, the Bank of Canada issued a cautionary note about the challenges in its 2016 Financial System Review. In a recent study of the country’s large public pension funds, the central bank stated that “trends toward more illiquid assets, combined with the greater use of short-term leverage through repo and derivatives markets may, if not properly managed, lead to a future vulnerability that could be tested during periods of financial market stress.”

In its June 2016 paper, “Large Canadian Public Pension Funds: A Financial System Perspective,” the central bank noted the big eight funds have increased their use of leverage, but the amounts on the balance sheet are not considered high.

However, the BoC cautioned that although balance-sheet leverage — defined as the ratio of a fund’s gross assets to net asset value — varies greatly across the funds and appears “modest as a group,” it is still “not possible to precisely assess aggregate leverage using public sources” because it can take on many forms in addition to what is shown on the balance sheet.

“If not properly managed, these trends my lead in the future to a vulnerability that could create challenges on a severely stressed financial market,” the central bank paper warned.

Oversight for most public pension funds, not including the CPPIB, which is federally chartered, falls to the provinces and their regulators are non-arms’ length organizations created by, and report to, the provinces, which also directly and indirectly sponsor many of the same plans being supervised. In other words, pension regulators are not truly independent the way the Office of the Superintendent of Financial Institutions is to the financial sector.

“Can a regulator staffed by members of public-sector pension plans effectively regulate public-sector pension plans?” said C.D. Howe’s Hamilton. “In particular, can such a regulator protect the public interest if the public interest conflicts with the interests of the government and/or the interests of plan members? I think not.”

Furthermore, he said, most pension fund managers would characterize their behaviour as “prudent and creatively adapting to an unforgiving and challenging environment.”

Over at Ontario Teachers’, chief investment officer Bjarne Graven Larsen, welcomed the central bank’s scrutiny and acknowledged that risk is an integral part of any investment strategy. The trick as the pension plan evolves, he said, is to make sure there is adequate compensation for the amount of uncertainty.

“You have to have risk, that’s the way you can earn a return,” Graven Larsen said. Not every transaction will work out according to plan, of course, but he said the strategy is to ensure that losses will not be too great when assets or market conditions fail to meet expectations, even if that means taking a lower return at the outset.

Ontario Teachers’, the largest single-profession plan in Canada, recently moved its risk functions into an independent department and is also tweaking its portfolio construction in an attempt to account for the largest risks it takes and calibrate other positions to balance the potential downside.

“But you will, over time, be able to harness a risk premium and get the kind of return you need with diversified risk — that’s the approach, what we’ve been working on,” Graven Larsen said.

CPPIB, meanwhile, doesn’t have a designated chief risk officer, a key executive who plays a critical role balancing operations and risk. That absence sets it apart from other major government pension plans and other major Canadian financial institutions such as banks and insurers, according to Jason Mercer, a Moody’s analyst.

“A chief risk officer plays devil’s advocate to other members of management who take risks to achieve business objectives,” Mercer said. “The role provides comfort to the board of directors and other stakeholders that risks facing the organization are being overseen independently.”

For its part, CPPIB officials said they have created a framework that doesn’t rely on a single executive to monitor risk. Michel Leduc, head of global public affairs at CPPIB, said the pension organization has an enterprise risk management system that runs from the board of directors, through senior management, to professionals in each of the pension’s investment departments.

“This decentralized model ensures that individuals closest to the risks and best equipped to exercise judgment have local ownership over management of those risks,” Leduc said.

The risks some critics find worrisome, CPPIB officials see as a strength, courtesy of the funds’ unique characteristics, namely a steady and predictable flow of contributions — about $4 billion to $5 billion a year.

CPPIB in 2014 began shifting the investment portfolio to recognize that the fund could tolerate more risk while still carrying out the pension management’s mandate of maximizing returns without undue risk of loss.

The plan is to gradually move from a mix reflecting the “risk equivalent” of 70-per-cent equity and 30-per-cent fixed income to a risk equivalent of 85-per-cent equity and 15-per-cent fixed income by 2018.

With unprecedented amounts of money pouring into public pensions — fuelled by heightened assumptions from governments about what Canadians should expect to receive — the chorus for closer examination of the sector will likely reverberate.

After all, for all the bouquets tossed at them on the world stage, Canada’s public pension funds still have to prove whether their high-profile investments are worth the risk to those at home.
This article was written last Saturday. I stumbled across it yesterday when I read Andrew Coyne's article on keeping tax dollars and public pension plans away from infrastructure spending.

I might address Coyne's latest ignorant drivel in a follow-up comment (he keeps writing misleading and foolish articles on pensions), but for now I want to focus on the article above on Canada's new masters of the universe.

First, let me commend Theresa Tedesco and Barbara Shecter for writing this article. Unlike Coyne, they actually took the time to research their material, talk to industry experts, including some that actually work at Canada's large public pension funds (something Coyne never bothers doing).

Their article raises several interesting points, especially on governance lapses, which I will discuss below. But the article is far from perfect and the main problem is it leaves the impression that Canada's large pension funds are taking increasingly dumb risks investing in illiquid asset classes all over the world.

I believe this was done purposely in keeping with the National Post's blatantly right-wing tradition of fighting against anything that seems like big government intruding in the lives of Canadians. The problem is that the governance model at Canada's large pensions was set up precisely to keep all levels of government at arms-length from the actual investment decisions, something which is mentioned casually in this article.

[Note to National Post reporters: Next time you want to write an in-depth article on Canada's large pension funds, go out to talk to experts who work at these funds like Jim Keohane, Ron Mock and Mark Machin or people who retired from these funds like Claude Lamoureux, Jim Leech, Neil Petroff, Leo de Bever. You can also contact me at and I'll be glad to assist you as to where you should focus your attention if you want to be constructively critical.]

In a nutshell, the article above leaves the (wrong) impression that Canada's large pensions are not regulated or supervised properly, oversight is fast and loose, and they're taking huge risks on their balance sheets to invest in assets all over the world, mostly in "risky" illiquid asset classes.

Why are they doing this? Because interest rates are at historic lows so investing in traditional stocks and bonds will make it impossible for them to attain their actuarial return target, forcing them to slash benefits and raise contributions, tough choices they prefer to avoid.

The problem with this article is it ignores the "raison d'être" for Canada's large pensions and why they all adopted a governance model which allows them to attract and retain investment professionals to precisely take risks in global public and private markets others aren't able to take in order to achieve superior returns over a very long period --  returns that far surpass Canadian balanced funds which invest 60/40 or 70/30 in a stock-bond portfolio.

The key point, something the article doesn't emphasize, is Canada's well-known balanced funds charge outrageous fees and deliver far inferior results relative to Canada's large public pension funds over a long period precisely because they are only able to invest in public markets which offer lousy returns given interest rates are at historic lows. Even the alpha masters, who charge absurd fees, are not delivering the results of Canada's large pensions over a long period.

And it's not just fees, even if all Canadians did was invest directly in low-cost exchange-traded funds (ETFs) or through robo-advsiors, they still won't be as well off in the long run compared to investing their retirement savings in one of Canada's large, well-governed defined-benefit plans.

Why? Because Canada's large defined-benefit pensions use their structural advantages to invest across public and private markets all over the world, and they're global trendsetters in this regard.

[Note: This is why last week I argued that Norway's pension behemoth should not crank up equity risk and is better off adopting the asset allocation that Canada's large pensions have adopted, provided it gets the governance right.]

The brutal truth on defined-contribution plans is they are leaving millions at risk of pension poverty which is why unlike the Andrew Coynes of this world, I kept harping on enhancing the CPP knowing full well Canadians are getting a great bang for their CPP buck.

And when I read about what is happening to Nortel's pensioners, it infuriates me and reminds me that there is still a lot of work left to do in terms of pension policy in this country, like creating a new large, well-governed public pension here in Montreal in charge of managing the assets of all Canadian DB and DC corporate pensions (Montreal is home to the country's best corporate DB pensions like CN's Investment Division and Air Canada Pensions).

Having said all this, I don't want to leave the impression that everything at Canada's large public pensions is just peachy and there is no room to improve their world-class governance.

In particular, I agree with some passages in the article above. Most of the financial industry is subject to extreme regulations, regulations which do not impact Canada's large pensions in the same way.

This isn't a bad thing. Some of them are using their AAA balance sheet to intelligently take on more leverage or emit their own bonds to fund big investments in private markets.

A lot of this is discussed in the report the Bank of Canada put out this summer on large Canadian public pension funds. And while the report highlights some concerns, it concludes by stating:
No pension fund can achieve a 4 per cent average real return in the long run without assuming a certain amount of properly calibrated and well-diversified risk. This group of large Canadian pension managers seem generally well equipped to understand and manage that risk. The ability of the Big Eight to withstand acute stress is important for the financial system, as well as for their beneficiaries. They can rely on both the structural advantages of a long-term investment horizon and stable contributions. Moreover, they have reinforced their risk-management functions since the height of the 2007–09 global financial crisis.
No doubt, they have reinforced their risk-management functions since the global financial crisis and some of the more mature and sophisticated funds are monitoring liquidity risks a lot more closely (OTPP for example), but all the risk management in the world won't prevent a large drawdown if another global financial crisis erupts.

And it is important to understand there are big differences at the way Canada's large pensions manage risk. As mentioned in the article, CPPIB doesn't have a chief risk officer, instead they opted to take a more holistic view on risk and have ongoing discussions on risk between department heads (this wasn't always the case as they used to have a chief risk officer).

Is that a good thing or bad thing? Do you want to have a Barbara Zvan in charge of overseeing risk at your pension fund or not? There is no right or wrong answer here as each organization is different and has a different risk profile. CPPIB is not a mature pension plan like OTPP which manages pensions and liabilities tightly, so it can focus more on taking long-term risks in private markets and less on tight risk management which it already does in a more holistic and individual investment way.

I personally prefer having a chief risk officer that reports directly to the Board, not the CEO, but I also recognize serious structural deficiencies at some of Canada's large pensions where different department units work in a vacuum, don't share information and don't talk to each other (this is why I like CPPIB's approach and think PSP Investments is also moving in the right direction with PSP One).

Are there risks investing in private markets? Of course there are, I talk about them all the time on my blog, like why these are treacherous times for private equity and why there are misalignment of interests in the industry. Moreover, there are big cracks in commercial real estate and ongoing concerns of pensions inflating an infrastructure bubble.

That is all a product of historic low interest rates forcing everyone to chase yield in unconventional places. We can have a constructive debate on pensions taking on more risk in private markets, but at the end of the day, if it is done properly, there is no question that everyone wins including Canada's pension leaders which get compensated extremely well to deliver stellar long-term results but more importantly, pension beneficiaries who can rely on their pension no matter what happens in these crazy schizoid public markets.

But I am going to leave you with something to mull over, something the Bank of Canada's report doesn't discuss for obvious political reasons.

In 2007, I produced an in-depth report on the governance of the federal public service pension plan for the Treasury Board of Canada going over governance weaknesses in five key areas: legislative compliance, plan funding, asset management, benefits administration, and communication.

If I had to do it all over again, I would not have written that report (too many headaches for too little money!), but I learned a lot and the number one thing I learned is this: there is always room for improvement on pension governance.

In particular, as Canada's large pensions engage in increasingly more sophisticated strategies across public and private markets, levering up their balance sheets or whatever else, we need to rethink whether there are structural deficiencies in the governance of these large pensions that need to be addressed.

For example, I've long argued that the Office of the Auditor General of Canada is grossly understaffed and lacking resources with specialized financial expertise to conduct a proper independent, comprehensive operational, investment and risk management audit of PSP Investments (or CPPIB) and think that maybe such audits should be conducted by the Office of the Superintendent of Financial Institutions or better yet, the Bank of Canada.

In fact, I think the Bank of Canada is best placed to be the central independent government organization to aggregate and interpret all risks taken by Canada's large pensions (maybe if they did this in the past, we wouldn't have had the ABCP train wreck at the Caisse).

Just some food for thought. One thing I can tell you is that we definitely need more thorough operational, investment and risk management audits covering all of Canada's large pensions by independent and qualified experts and what is offered right now (by the auditor generals and other government departments) is woefully inadequate.

But let me repeat, while there is always scope for improving governance and oversight at Canada's large pensions, there is no question they are doing a great job investing across public and private markets all around the world and their beneficiaries are very lucky to have qualified and experienced investment professionals managing their pensions at a fraction of the cost in would cost them to outsource these assets to external managers (the figures cited in the article above are off).

That is a critical point that unfortunately doesn't come out clearly in the article above which leaves the impression that all Canada's large pensions are doing is taking undue risks all over the world. That is clearly not the case and it spreads a lot of misinformation on Canada's large, well-governed defined-benefit pensions which quite frankly are the envy of the world and deservedly so.

Below,  on OECD-based infrastructure have become competitive, making Asia a new opportunity, says the Ontario Teachers' Pension Plan's Andrew Claerhout.

Smart man, listen to his comments and you will understand why infrastructure is gaining increasing interest from institutional investors with huge assets to invest and a very long investment horizon.