Monday, April 30, 2018

BlackRock Beefs Up its PE Group?

Trevor Hunnicutt of Reuters reports, BlackRock hires private equity specialists from Goldman Sachs:
BlackRock Inc said on Monday it is hiring two specialists from Goldman Sachs Group Inc to bolster its private equity business in New York, according to a staff memo.

Steve Lessar and Konnin Tam will join the world’s largest asset management company from Goldman Sachs this summer, according to the document, which was seen by Reuters.

Each will be responsible for expanding BlackRock’s role within a business that effectively enables investors in private companies and funds that invest in such firms to resell their stakes to other institutions. Normally, that money is locked up for years.

This market for “secondary” private capital saw a record $58 billion in transaction activity in 2017, according to investment bank Greenhill & Co Inc, with money chasing better returns than exist within public markets.

“Our plan is to place Steve and Konnin at the core of a team that will expand our existing offerings and make BAI the leader in this business,” said the memo, using the acronym for BlackRock Alternative Investors, a group that oversees largely private investments ranging from real estate to hedge funds.

BlackRock is known for more widely offered funds that invest in publicly traded stocks and bonds.

Yet Chief Executive Larry Fink has made it a priority to compete in private markets, too, against Goldman Sachs and other rivals better known for those sorts of investments, such as Blackstone Group LP. BlackRock was spun off from Blackstone more than two decades ago.

Fink told Wall Street analysts earlier this month that he expects so-called illiquid alternative investments, which include private equity and typically come with higher fees than its other funds, to “be one of the more significant” drivers for BlackRock’s business over the next few years.

Alternatives represent a fraction of BlackRock’s assets under management, growing at a slower rate than its other businesses, yet they account for outsized fee revenue.
Larry Fink is no fool, he knows where the big margins (highest fees) are in asset management and it's definitely not in stocks & bonds, BlackRock's traditional bread and butter business.

He first hired Mark Wiseman away from CPPIB to join his firm and recently hired André Bourbonnais from PSP to build this private markets team up.

Now he's hiring Steve Lessar and Konnin Tam, two stars at Goldman Sachs' Private Equity Group who specialize in secondaries.

You might be asking why secondaries? Let me explain. Go back to read my comment on whether CalPERS is outsourcing its private equity to BlackRock.

Early in January, John Gittelsohn and Melissa Mittelman of Bloomberg reported, Calpers Seeks Help Running Its $40 Billion Private Equity Portfolio:
The California Public Employees’ Retirement System, the largest U.S. pension fund, is formally soliciting a partner to help manage its $40 billion private equity portfolio.

The retirement system, which oversees more than $350 billion, sent requests for information in December to a group of asset managers seeking a “strategic partnership” for its private equity portfolio, according to a document released by Calpers. The partnership will work on opportunities for co-investments, funds, separate accounts and other vehicles.

“Calpers desires to create a collaborative partnership where the partner has investment discretion, but works with Calpers PE staff in the development of an annual allocation plan that Calpers will approve,” according to the solicitation request.

Possible partners include BlackRock Inc. and Neuberger Berman Group, among others, according to people familiar with the matter who asked to not be identified because the information is private. Spokesmen for both firms declined to comment.

Calpers plans to commit $7 billion to $10 billion a year in new capital to private equity, according to the solicitation. That follows comments by the system’s chief investment officer, Ted Eliopoulos, that he expects returns to decline amid expensive valuations and large pools of capital competing for deals. A record $453 billion was raised globally for private equity in 2017 and “dry powder,” or money awaiting commitment, exceeded $1 trillion at the end of December, Preqin Ltd. said in a report Thursday.

Joe DeAnda, a Calpers spokesman, declined to comment beyond an emailed statement saying, “This is part of our ongoing review of the private equity program, and we’ll spend a good part of 2018 continuing to explore strategic options.”

Calpers has been moving more of its investing capabilities, such as stock and bond management, in-house to reduce fees paid to outside firms. That’s harder to do with private equity because dealmaking expertise often commands compensation beyond what’s typically paid to internal managers at public pensions.

Under its current private equity program, Calpers has failed to meaningfully reduce fees or find co-investment opportunities to enhance its returns, according to a November report to the pension by consultant Meketa Investment Group.

The solicitation’s response deadline is Jan. 19. The Calpers investment committee will interview finalists in March and April with a decision on a partner to come later.
If I was betting on who CalPERS will hire to help them clean up their private equity portfolio, BlackRock would be the one I'd bet on.

And CalPERS isn't the only US public pension fund that needs help cleaning up its private equity portfolio, others will surely follow.

So, Steve Lessar and Konnin Tam are going to be very busy with secondaries in this massive portfolio and it makes sense to hire these two specialists away from Goldman Sachs.

What's the endgame for BlackRock? I already told you, Larry Fink doesn't just want to become the next Warren Buffett, he wants to dominate asset management across public and private markets.

There's a reason why BlackRock's founder and chief executive made $28m last year, up by nearly 10 per cent from 2016 and 195 times the median compensation at the world’s biggest asset manager, he's delivering great long-term results for his shareholders (click on image):

But as I told you on Friday, it's the end of good days for markets, so BlackRock needs to prepare for the storm ahead.

The storm I'm warning of will hit public and private markets but BlackRock needs to focus on expanding its operations in private markets because that's where big institutions are focusing their attention and that's where many US public pension funds need help.

You're going to read all sorts of good and bad comments on private equity but the truth is even the industry is bracing for a downturn (which is why I expect activity in secondaries to pick up).

So what is it? Is it the rise and rise of private equity or is it private equity laid bare? I suspect it's somewhere in the middle but one expert shared this with me:
Under conflicts, "Tunnelling" is an extremely serious allegation. He better have some facts to back that up.

IRR's are not meaningless to the investor experience. I would argue everyone should compute IRR for all asset class investment decisions. Right sizes returns for growing programs with higher dollars typically invested over time. Institutions quoting average annual returns while growing dramatically mislead how they are doing.

Fees and transparency is not the problem he makes it out to be. You sign the fee contract, so nothing prevents one from understanding what one is signing. When one understands why the fees are the way they are, the task is to determine if you are getting value for money. But the fee/terms alignment of interest is actually reasonable, or as much as can be to get both general and limited partners to want to be in the business. Those who have never been a general partner, which is most people require a lot of maturity to understand how hard it is to build these businesses to success for all.

PE has become large but is still small relative to global capital markets. It is targeted to sophisticated investors who are supposed to be able to look after themselves. If you dumb it down, you just put huge resources into protecting lazy people. ‎Let the public market take care of those that need it.

There is nothing fundamentally wrong with PE. It can be what its investors want it to be. If there are problems, the investors can fix them. My only issue is that fear mongering favours the goliath LBO focused firms that over resource for all these fears, but end up at way too large a scale. PE is best as a middle market focussed, craft type business, with a tilt to acquisitions and restructurings as the main skill set you are trying to advantage. I also believe growth capital with venture attributes remains under exploited. There are plenty of choices to do it the right way.

‎Trust me, having exposure to the underbelly of the public markets, the shenanigans that go on there‎, with the banks and investment banks, CEO's and the comp consultants, etc. makes the PE business look like an honour society.
He also added this on the rise and rise of private equity:
Being favourable on PE is like saying one is favourable on derivatives or public markets. It is all about execution, and we should all be glad we have so many execution choices. Most assets classes, however defined are not very favourable at the mean level of performance. Of course we all think we are better than average, that's why track record, if true and verifiable, is so valuable.
You need smart people who are able to verify the track record of GPs and make sure they're delivering what they promised to deliver and have proper alignment of interests.

That's what Larry Fink is doing at BlackRock, hiring smart people who can execute and gather assets from institutional investors who need help improving or ramping up their private equity portfolio (like sovereign wealth funds).

Below, BlackRock CEO Larry Fink recently told CNBC don't try to time this wild stock market. "We spend too much time talking about market timing," said Fink, co-founder of the world's largest money manager. "The key for investors is to stay in the market. ... You should be 100 percent in equities."

I respectfully disagree, think investors should be overweight US long bonds (TLT) here as I truly believe it's the end of good days for markets.

But unlike Larry Fink, I'm not in the asset gathering business which has made him a billionaire, I'm in the eat-what-you-kill business and if I don't kill anything, I starve to death.

Friday, April 27, 2018

End of Days For Markets?

Tae Kim of CNBC reports, Amazon hits all-time high as Wall Street gushes over Prime price hike, new markets:
Wall Street is buzzing over Amazon's impressive March quarter results.

Analysts are growing more confident over the prospects for many of Amazon's new businesses including subscription services, advertising and cloud computing.

The e-commerce juggernaut reported better-than-expected first-quarter earnings results Thursday. It also gave profit guidance for its second quarter significantly above Wall Street expectations.

Amazon shares soared as much as 7.9 percent in early trading Friday, briefly surpassing its all-time high of $1,617.54.

Goldman Sachs reiterated its buy rating, saying Amazon is still in the "early stages" in many of its key markets.

"We are in the sweet spot between Amazon investment cycles where new fulfillment/data centers are driving accelerating revenue growth while incremental capacity utilization is driving margin expansion," analyst Heath Terry wrote in a note to clients Friday. "We still remain in the early stages of the shift of compute to the cloud and the transition of traditional retail online and, in our opinion, the market is underestimating the long-term financial benefit of both to Amazon."

Terry raised his price target for Amazon shares to $2,000 from $1,825, representing 32 percent upside from Thursday's close.

Several analysts expressed optimism over the company's Amazon Prime price hike. The company announced on Thursday it plans to increase the price of its annual Prime membership to $119 from $99 starting on May 11.

"We are raising our topline and operating margin estimates for FY:18 and beyond reflecting the continued momentum in Prime and accelerating growth in its two more profitably businesses, AWS and advertising," Stifel analyst Scott Devitt wrote in a note to clients Friday.

Devitt raised his price target to $2,020 from $1,800 and reaffirmed his buy rating for the company's stock.

J.P. Morgan believes consumers will stick with the service even with its higher cost.

"The last time AMZN raised the price of Prime was in March 2014, & we do not expect the company to get much pushback from consumers given the increasing value of the service," analyst Doug Anmuth wrote in a note to clients Friday.

UBS predicted Amazon's Prime price increase will benefit the company's subscription services sales growth.

"We believe that strong Prime member growth, and fast seller FBA [Fulfillment by Amazon] adoption will continue to advance Amazon's Prime + FBA flywheel effect that is likely to be supportive of a ~20% rev growth CAGR ('17-'22)," analyst Eric Sheridan wrote in a note to clients Thursday. Our "upward revision [of subscription services revenue] also reflects announced Prime membership fee increase."

In similar fashion, Bank of America Merrill Lynch predicted strong earnings growth from the company's high-profit margin new businesses.

"Amazon's share in its key markets continues to expand, supported by strong fulfillment infrastructure and Prime lock-in, while the earlier stage higher margins businesses of AWS and advertising are contributing to more meaningful profit growth," analyst Justin Post wrote in a note to clients Friday.

Post reiterated his buy rating and increased his price target to $1,840 from $1,650 for the company's shares.

Amazon is one of the best-performing large-cap stocks in the market. Its shares rallied 30 percent this year through Thursday versus the S&P 500's roughly flat return.
It's Friday, I get to relax my brain from pensions and focus on markets, markets, and markets!

It was a month ago where I was wondering whether a quant style crash has arrived and went over daily and weekly charts of Amazon (AMZN), Facebook (FB), Twitter (TWTR) and Tesla (TSLA) using the 50, 100 and 200-day and week moving averages.

I was cautious but should have blindly bought the dip on all these stocks except Tesla which I still think is fragile.

Funny thing, when you're trading and looking back, it's easy to say "I should have bought the dip" but when it comes to risking your own capital, it's much harder pulling the trigger.

Importantly, while buying the big dips on big tech has proven to be a winning strategy, especially for hedge fund quants, there will come a time when the music stops for these Boom Boom markets and momentum traders will get their head handed to them.

I think we're coming close to an important market juncture. I don't see chaos ahead, at least not yet, but as I stated a couple of weeks ago, the market isn't underestimating great earnings, it's simply looking well past Q1 earnings season.

Let me give you two specific examples by looking at Amazon (AMZN) and Boeing (BA) shares this week (click on images to enlarge):

Both companies are leaders. Amazon is a leader driving the NASDAQ higher and Boeing is the main reason why the Dow Jones has done so well over the last couple of years.

But I noticed something. Boeing reported blowout earnings mid-week and so did Amazon today and yet the market basically yawned. Other companies have seen their shares decline after great earnings.

What is going on? I think we're reaching an important juncture here where you have peak earnings which typically coincide with peak coincident economic indicators at a time when short rates are rising and the Fed is still intent on raising rates despite the flatter yield curve signaling a slowdown ahead.

Interestingly, the yield on the 10-year Treasury note hit the all-important 3% this week and even surpassed it temporarily, hitting a one-year high of 3.04% on Wednesday, before falling back below 3% to close at 2.96% on Friday (click on image):

Notice long bond yields have backed up quite a bit over the last year which is why US long bond prices (TLT) are bouncing around their 52-week lows and are off their yearly highs (remember bond yields move in opposite direction from bond prices; click on image):

Last week, I explained why the market is worried about oil and rates, going into detail how the rise in energy prices has lifted inflation expectations over the last year which has been why long bond yields have risen too.

However, I also noted the yield curve is flattening because short rates are rising faster than long rates and that I see a second half slowdown ahead where we risk seeing an inversion of the yield curve:
[...] it's worth noting most of the rally in commodities is driven by higher oil prices so it's also important to take a step back here and THINK of the fundamental ramifications:
  • Higher oil prices lead to higher gas prices and in a debt-laden economy, higher gas prices pretty much wipe out Trump's tax cuts for most Americans, which is why he came out to tweet against OPEC on Friday morning. I found it interesting that Minister Mohammed bin Hamad Al Rumhi of Oman came out shortly after to state oil prices probably won't rise much beyond recent highs near $75 a barrel this year (of course, OPEC is petrified of Trump nor does it want oil prices too high to risk a global recession).
  • More importantly, the Fed has raised rates six times and will continue to raise for the foreseeable future, global PMIs are rolling over, which means a global economic slowdown is ahead, so even if oil prices keep creeping up this summer, it will only add fuel to the fire by tightening financial conditions even more.
  • The yield curve hasn't inverted yet but investors can't ignore it and as AIMCo's CIO Dale MacMaster told me yesterday, the forward yield curve has inverted which is worrisome.
All this to say, those playing the "sector rotation" into energy (XLE) or metals and mining (XME) thinking this is a sustainable rally really need to ask themselves some tough questions as to how sustainable this rally in cyclical energy shares really is.

I still maintain that going forward, US long bonds (TLT) will offer the best risk-adjusted returns. The rise in oil prices and the rise in long bond yields only makes me more certain that a slowdown is ahead and I'd be jumping on US long bonds at this level, especially if the 10-year Treasury yield surpasses 3% which it might (but I still have my doubts).

To recap, I'm preparing for a second half global 'synchronized' economic downturn, and as such I'm recommending investors to trim risk in their portfolio by investing at least 50% in US long bonds (TLT) and overweighting consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweighting cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

I also think too many investors still don't understand the inflation disconnect and they're being sucked into a market phishing for inflation phools.

What else? It's critically important to understand inflation is a lagging indicator. An astute investor and reader of my blog sent me a comment from Kessler Investment Advisors explaining how inflation is the caboose of the economy.
I know, David Rosenberg thinks markets better prepare for stagflation but I respectfully disagree.

Let me repeat, and I say this with great respect to David Rosenberg and others who are worried about stagflation, the biggest risk ahead is DEFLATION unlike anything we've ever seen, not 1970s-style stagflation or stagflation of any kind.

What about oil and commodity prices and rising labor costs? What about them? There was a brief rally and energy shares caught up but I remain very cautious on this sector for the simple reason that I can distinguish between cyclical inflation due to higher oil prices and a lower US dollar and structural deflationary headwinds which remain alive and are gaining steam.

You see while Jeff Bezos can raise the Amazon Prime rate by $20 and reap billions in gains, more than half of 60-somethings say they're delaying retirement because they can't afford to retire, and this despite the triple-digit gains in the stock market over the last nine years and its positive impact on Americans' savings.

Inequality, the retirement crisis, high structural unemployment, especially among young workers and increasingly among older workers, are all part of the deflation theme I've long been worried about. High debt will only exacerbate structural deflation.

But even on a cyclical basis, macro winds are shifting. Last week, I told you to pay attention to the US dollar (UUP) as it might be turning the corner here (click on image):

The US dollar made big gains this week and I expect this to continue as economic weakness in the rest of the world persists.

Importantly, in the second half of the year we will likely see a flatter yield curve which might invert, higher volatility in risk assets, a rally in both US long bonds and the US dollar which doesn't make sense to most people except when the world is scared, everyone wants to own US assets.

Some market pundits are warning you there's nowhere to hide as asset correlations are flashing caution to investors (click on image):

I say bullocks! Given my fears of long-term deflation, I think you can hedge a lot of downside risk in your portfolio via good old boring US long bonds (TLT) even if rates are low by historical measures.

And if long bond rates head lower in the second half of the year, you want to overweight consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweight cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

A little note on dividend stocks, however, be careful because some like BCE (BCE) are more solid than pipelines like Enbridge (ENB) here even if both experienced a sell-off as long bond yields backed up (click on images):

Both stocks provide excellent dividends but there are a lot of reasons why pipelines are getting killed in Canada so proceed with caution when picking your dividend stocks (still, I prefer pipelines over energy stocks).

What about technology shares (XLK)? Despite the big rally in FANG stocks this week, I remain cautious (click on image):

I'm actually bearish on semiconductor shares (SMH) and would favor less cyclical tech shares like sofware here (click on image):

What about biotech (XBI), Leo, you like biotech, right? Nope, even here I would proceed with extreme caution and choose my biotech shares wisely (click on image):

From my vantage point, it's becoming a lot more of a market of stocks (alpha) than a stock market (beta) game. Investing in ETFs won't cut it in this environment we're headed into but what do I know, I'm just making a casual observation from staring at my screens all day.

Below, you will find the biggest gainers and losers on my watch list for Friday, April 27 (click on image):

Unless you're an expert trader or investor, don't even think about trading or investing in any of these stocks, you will get your head handed to you.

I screen stocks and read macro 24 hours a day and have gotten my head bashed on more than one occasion, so I know what I'm talking about.

Are there stocks I like here? Sure, I'm looking closely at Teva Pharmaceuticals (TEVA), Valeant Pharmaceuticals (VRX) and Intrexon Corp (XON) but who cares? That doesn't mean anything in these markets and unless you know how to trade and invest properly, don't bother with the stock selection game because a) your timing is critical and b) you need to be very lucky.

Every other day, I call or email Fred Lecoq, my former colleague from PSP, and we screen stocks together and sometimes we agree and many times we disagree. He still likes energy shares (XLE) here, I don't, but we both agree that we missed the big rally in shares of First Solar (FSLR) and that it might rally further (he's more bullish than I am on that stock now, thinks there's more upside):

Another stock Fred likes here is McKesson Corp. (MCK) as it got hit after Amazon announced a joint venture into healthcare which it recently said it wouldn't go through with (click on image):


It's getting late, I'm hungry, will eat dinner and call it an early night because I want to get lots of sleep. I stayed up late last night watching an old Arnold Schwarzenegger movie, End of Days, and woke up early today (I regret it!).

Below, CNBC's Wilfred Frost and Seema Mody discuss the day's market action and earnings coming next week. And Dominic Chu looks ahead to what are likely to be next week's top business and financial stories.

Dominic Chu also reports that a technical glitch has halted trading for all exchanges operated by the TMX group in Canada (how embarrassing, this I why I only trade on US exchanges).

Fourth, take the time to watch the full interview with ValueAct CEO Jeffrey Ubben, he raises many interesting points.

Lastly, the trailer from the movie End of Days. Whatever you do, don't ever stay up late to watch this garbage, you're way better off dozing soundly in bed! And don't believe everything stock strategists tell you, they don't realize it but it's the end of (good) days for stocks for the remainder of the year.

Thursday, April 26, 2018

OMERS Sells Stake to VINCI Airports?

Benefits Canada reports, OMERS sells stake in international airport portfolio:
The infrastructure arm of the Ontario Municipal Employees Retirement System has entered an agreement to sell its stake in Airports Worldwide Inc., a portfolio of airport assets and management contracts.

“OMERS first invested in AWW in 2009,” said Ralph Berg, executive vice-president and global head of infrastructure for OMERS Private Markets, in a press release.

“We have focused our efforts since that time on positioning the asset for long-term success and are very proud of the value we have created with this investment for OMERS members.”

OMERS, which expects the transaction to close later in 2018, didn’t disclose the financial details of the sale.

“OMERS has worked closely with the management teams across the group to grow the portfolio, optimize performance and build strong relationships with airline partners and other stakeholders,” said Juan Camargo, director of OMERS Infrastructure, in a press release.

“We are grateful to AWW management for their efforts and wish them continued success.”

Vinci Airports, the buyer of OMERS’ stake, is growing its collection of airport assets, adding to the 36 it already manages in Europe, Asia and South America.
Ted Liu of Private Capital Journal also reports, Vinci Airports to acquire Airports Worldwide from OMERS:
OMERS Infrastructure along with co-investors have entered into a definitive agreement to sell Airports Worldwide, Inc. to Vinci Airports, a VINCI Concessions subsidiary. Financial terms were not disclosed.

The transaction is expected to close later this year. O’Melveny served as OMERS legal advisor and Citi served as OMERS financial advisor.

Houston, Texas based Airports Worldwide, formerly ADC & HAS Airports Worldwide, Inc., is majority owned by OMERS with HAS Development Corporation and Airport Development Corporation (ADC) as minority shareholders.

In April 2009, HAS Development Corporation, an affiliate of the Houston Airport System (HAS), and Airport Development Corporation (ADC), a Canadian airport developer, and OMERS Strategic Investments formed a strategic partnership operating under the name ADC & HAS Airports Worldwide, Inc.

In February 2013, OMERS Strategic Investments became the majority equity shareholder in Airports Worldwide.

Active on two continents, Airports Worldwide is a portfolio of airport assets and management contracts located in the United States, Costa Rica, Northern Ireland and Sweden.

News Release

VINCI Airports enlarges its network of airports in the United States, the United Kingdom, Costa Rica and Sweden

24 APRIL 2018 – 8:30 AM – ACQUISITIONS

– Signature of an agreement to acquire the portfolio of Airports Worldwide, comprising two freehold property airports, three airports under concession and four under full management contracts as well as three partial management contracts in American airports1
– A strategic move into the USA, the world’s largest air transport market, that also bolsters our presence in Europe and Central America
– A worldwide network expanded to 45 airports welcoming more than 182 million passengers per year2

VINCI Airports, a VINCI Concessions subsidiary, is acquiring nine new airports (two freehold property, three concession, four management contracts) and three partial management contracts in American airports following acquisition of the airport portfolio held by Airports Worldwide1.

The operation boosts VINCI Airports’ global network, which now includes 45 airports in 11 countries and on three continents. It also increases the number of passengers welcomed in its airports by 25.6 million to more than 182 million per year.

The portfolio acquired by VINCI Airports consists of:

– Two freeholds property: VINCI Airports is acquiring a 100% stake in Belfast International Airport in Northern Ireland, which welcomed 5.8 million passengers in 2017, and a 90.1% stake in Skavsta Airport near Stockholm, Sweden, which welcomed 2.1 million passengers in 2017.

– Three airports under concession: VINCI Airports is acquiring a 100% stake in Orlando-Sanford International Airport (Florida, USA), which welcomed 2.9 million passengers in 2017, under a concession contract covering operation of the current terminal and car park with a residual term of 21 years; together with co-control stakes in Costa Rica’s two major airports, i.e. a 48.75% stake in Juan Santamaria International Airport in San José and a 45% stake in Daniel Oduber Quiros International Airport in Liberia, which served 4.8 million and 1.1 million passengers in 2017 respectively, under concession contracts with residual terms of eight and 13 years.

– Four full management contracts covering Hollywood Burbank Airport, which welcomed 4.7 million passengers in 2017, and Ontario International Airport, which welcomed 4.2 million passengers in 2017, in California; and Macon Downtown Airport and Middle Georgia Regional Airport in Georgia3.

– Three partial management contracts covering US airports: Atlantic City International Airport in New Jersey, Raleigh Durham International Airport in North Carolina, and part of the international terminal at the airport in Atlanta, Georgia, the world’s largest airport in terms of traffic.

This acquisition allows VINCI Airports to make a strategic move into the USA, giving it an entry point into the world’s largest air transport market.

It also strengthens VINCI Airports’ presence in Europe, where the group already operates 12 airports in France and 10 in Portugal, plus the Nikola-Tesla airport in Belgrade, Serbia, for which VINCI Airports signed a concession contract on 22 March this year. Lastly, the acquisition of the two main airports in Costa Rica, an increasingly popular tourist destination, strengthens VINCI Airports’ positions in South and Central America, where it manages the airports in Santiago, Chile and Salvador, Brazil, together with six airports in the Dominican Republic including the airport in Santo Domingo.

1 Agreement subject to the approval of the relevant authorities and the partners.
2 In comparison with 156,6 million passengers welcomed in 2017, including traffic of fully consolidated companies and 100% of equity accounted companies held on January 1, 2017 on a full-year basis, plus Salvador airport, which VINCI Airports has been managing since January 2, 2018, but excluding Kobe (Japan) and Belgrade (Serbia) airports.
3 Macon Downtown Airport is a business airport; Middle Georgia Regional Airport welcomes some 2,000 passengers per year.

About VINCI Airports

VINCI Airports, a top 5 global player in the international airport sector, manages the development and operation of 36 airports located in France, Portugal (including the Lisbon hub), Cambodia, Japan, Chile, Dominican Republic and Brazil. Served by around 250 airlines, VINCI Airports’ network handled 157 million passengers in 2017. Through its expertise as a comprehensive integrator and the professionalism of its 12,000 employees, VINCI Airports develops, finances, builds and operates airports, leveraging its investment capability, international network and know-how to optimise the management and performance of existing airport infrastructure, facility extensions and new-build construction projects. In 2017, its consolidated revenue amounted to €1.4 billion.


VINCI is a global player in concessions and contracting, employing close to 195,000 people in some 100 countries. We design, finance, build and operate infrastructure and facilities that help improve daily life and mobility for all. Because we believe in all-round performance, above and beyond economic and financial results, we are committed to operating in an environmentally and socially responsible manner. And because our projects are in the public interest, we consider that reaching out to all our stakeholders and engaging in dialogue with them is essential in the conduct of our business activities. VINCI’s goal is to create long-term value for its customers, shareholders, employees, and partners and for society at large.
For its part, OMERS put out a press release, OMERS Infrastructure Agrees to Sale of Airports Worldwide to Vinci Airports:
OMERS Infrastructure, the infrastructure investment manager of OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada, today announced that it has entered into a definitive agreement to sell its interests in Airports Worldwide (“AWW”) to Vinci Airports.

Active on two continents, AWW is a portfolio of airport assets and management contracts located in the United States, Costa Rica, Northern Ireland and Sweden.

"OMERS first invested in AWW in 2009. We have focused our efforts since that time on positioning the asset for long-term success, and are very proud of the value we have created with this investment for OMERS members. We wish the AWW team and Vinci all the best, as the company takes this next step in its evolution," said Ralph Berg, Executive Vice President & Global Head of Infrastructure, OMERS Private Markets.

“OMERS has worked closely with the management teams across the group to grow the portfolio, optimize performance and build strong relationships with airline partners and other stakeholders. We are grateful to AWW management for their efforts and wish them continued success.” added Juan Camargo, Director, OMERS Infrastructure.

The transaction is expected to close later this year. Further financial information will not be disclosed.

O’Melveny served as OMERS legal advisor; Citi served as OMERS financial advisor.


About Airports Worldwide

The AWW portfolio comprises operations at 12 airports located in the United States, Costa Rica, Northern Ireland and Sweden. AWW interests include long-term management contracts or concession agreements at the Orlando-Sanford International Airport in Florida, and Costa Rica's two main airports, Juan Santamaria International Airport (San José) and Daniel Oduber Quiros International Airport (Liberia). AWW also owns as freehold airports Belfast International Airport in Northern Ireland, and the majority interest in Stockholm Skavsta Airport.

In addition, AWW provides services under management contracts at seven US airports, including Hollywood Burbank Airport and Ontario International Airport (California), Atlantic City International Airport (New Jersey), Raleigh Durham International Airport (North Carolina), Macon Airport and Middle Georgia Regional Airport (Georgia) and the International Terminal, including Concourses E and F, at the Hartsfield Jackson Atlanta International Airport (Georgia).


OMERS Private Markets (OMERS Infrastructure and OMERS Private Equity) invests globally in infrastructure and private equity assets on behalf of OMERS, the defined benefit pension plan for Ontario’s municipal employees. Investments are aimed at steady returns to help deliver strong and sustainable pensions to OMERS members. OMERS Private Markets’ diversified portfolio of large-scale infrastructure assets exhibits stability and strong cash flows, in sectors including energy, transportation and government-regulated services. OMERS has employees in Toronto and other major cities across North America, the U.K., Europe, Asia and Australia. OMERS is one of Canada's largest defined benefit pension funds with net assets of more than C$95 billion. Visit for more information.
Go back to read my comment on OMERS' 2017 results. At the time, OMERS 2017 Annual Report wasn't available.

It's now available here and I urge you to take the time to carefully read their annual report, it's packed with information.

I want to skip to page 38 of the 2017 Annual Report to go over OMERS' Infrastructure performance (click on image to read):

As you can see, OMERS was busy selling infrastructure assets in 2017. In particular, along with Ontario Teachers', it sold its stakes in Britain’s High Speed 1 (HS1) rail project to a consortium of funds including HICL Infrastructure and South Korea’s National Pension Service (see details here).

And now it just announced it's selling an important stake in Airports Worldwide Inc. (AWW), a portfolio of airport assets and management contracts.

Details weren't provided but it's worth asking yourself why is OMERS selling some great infrastructure assets?

Last week, I covered AIMCo's 2017 results and spoke with Dale MacMaster, the CIO, who shared this with me on their infrastructure activities:
Dale told me AIMCo's Infrastructure portfolio delivered 9.2% in 2017, a 2% value add. He told me they took advantage of frothy markets and high demand to trim certain infrastructure assets which either didn't fit in the portfolio or still have great cash flows, a solid counterparties and provide good inflation protection but they wanted to realize on those gains and invest elsewhere. He said they are now taking much bigger stakes in infrastructure and their focus is on assets like ports where they see a backlog and good growth potential. The focus in Infrastructure is more in growth areas.
There is no doubt that several large Canadian pensions are selling infrastructure assets which they feel are fully valued. They're selling for all sorts of different reasons but chief among them is strong demand and they're getting top dollar for these assets.

There is a misperception that because infrastructure and real estate assets are very long-term, you never need to sell. Sure, it's hard to sell prized assets because you might never be able to buy them back at a reasonable price but many Canadian pensions do take advantage of strong markets to trim infrastructure assets from time  to time. There's nothing wrong with this.

What will do they do with the money? AIMCo is investing in ports, that's where it sees opportunities in infrastructure. OMERS might be doing the same thing, I don't know what their exact plans are in the short run.

What I do know is that infrastructure remains an important asset class but brownfield infrastructure assets are richly priced to say the least.

Still, for VINCI Airports this was a perfect fit to their existing portfolio of airport assets. This company is a world leader in airport concessions and even if they paid full value for these assets, it's a great long run move for them.

Below, VINCI Airports confirmed its place among the world’s top five airport operators, with a network of 35 facilities in six countries on three continents. Its 11,000 employees welcomed more than 132 million passengers. As the long-term partner of public authorities, local stakeholders and airlines, the company optimizes the operations and services of its airports to unlock their potential while creating an enhanced passenger experience. Leveraging its expertise and strengths in airport financing, design, operations and project management, VINCI Airports continues to open the world, contributing to regional development and serving the mobility needs of people everywhere.

And an interview with VINCI Airports’s CIO, Erik Schnekenberger, at the 2017 SITA IT Summit. He reveals how it is using technology to manage operational excellence and deliver consistent service, despite having such a wide global workforce.

Like I stated above, it's a great company, a world leader in operating airports, and one that OMERS will surely do deals with again.

Wednesday, April 25, 2018

Are Vestcor's Benchmarks a 'Joke'?

Robert Jones of CBC News reports, Exaggerated success: Province's pension managers profit from 'joke' target, analysts say:
A key measurement used to calculate bonuses for executives of the firm managing New Brunswick government employee pension funds produces exaggerated rewards and needs to be reviewed, say two pension analysts asked to look at the issue by CBC News.

"That benchmark is a joke and you can quote me on that," said Leo Kolivakis about the yardstick used by New Brunswick's Vestcor Investment Management Corporation to judge its managers' achievements handling what are called "absolute return" funds.

The absolute return investments have been generating modest gains for pensioners served by Vestcor but producing major bonuses for its pension executives, including an estimated $600,000 in bonus pay in 2016.

That's primarily because returns managers have to beat to win extra pay from its absolute return portfolio are set at less than one per cent.

"If I was sitting on their board, I would be asking why and I think you have every right to ask why are you compensating people based on (that) benchmark," said Kolivakis, who writes about Canadian pension funds in his publication, Pension Pulse.

Big bonuses

Vestcor, formerly the New Brunswick Investment Management Corporation, looks after more than $15 billion in retirement and other funds for public bodies in New Brunswick, including pension money for teachers, judges, civil servants, hospital workers, University of New Brunswick staff, NB Power employees and others.

Incentive pay has become increasingly important to Vestcor executives. During 2016 its top five managers, led by president John Sinclair, received a combined $1.7 million in bonuses, significantly more than the $1.2 million they were paid in base salary.

Most of those bonus payments are rewards for Vestcor management beating industry average returns, or benchmarks, on investments over a rolling four-year period. And although many of the benchmarks are tough to beat, that has not been the case for its "absolute return" investments.

In the latest four-year period documented in Vestcor's current annual report, the benchmark return managers needed to exceed on absolute return funds to generate bonus pay was just 0.77 per cent — less than the rate of inflation

Managers generated a modest annualized return on the funds of 4.78 per cent, but the difference between the two is so great it flooded management's bonus pool with an estimated $600,000 in rewards in 2016 alone.

Poorly set target

Kolivakis said beating a benchmark by that kind of a margin is normally the sign of a poorly set target, not exceptional investing.

"If I keep seeing investment managers trouncing their benchmarks, if you trounce your benchmarks in any investment activity, there's an issue," said Kolivakis.

Absolute fund investing has become increasingly favoured by Vestcor managers, who nearly quadrupled the amount of money dedicated to it over four years from $353 million to $1.1 billion.

Vestcor's board of directors did not respond to a request for information on why the organization sets the benchmark for management to beat on absolute return investments, and generate bonus pay, below the rate of inflation.

'I could do that'

But Thomas Schneeweis, a professor emeritus of finance at the Isenberg School of Management in Amherst Massachusetts, said the benchmark is inappropriately low and beating it the way Vestcor managers have been suggests it's being over rewarded.

"You don't impress me when you made four per cent. I expect that (from absolute return funds). I could do that," said Schneeweis.

"All markets are amazingly efficient and there is almost no evidence of outperformance over time – if properly measured."

According to Schneeweis, the objective of absolute fund investigating is to generate constant or absolute returns, whether markets rise or fall.

That is done by pairing up investments that tend to move in opposite directions — like betting on both heads and tails during a coin flip — but with enough of an edge built in either way any outcome will still generate a positive return.

But the exercise is not without risk, according to Schneeweis, and that is not reflected in the benchmark Vestcor is letting its managers beat.

"Your benchmark should reflect the risk of your particular portfolio," he said.

"The truth is very few people really understand the alternative investment industry."

There is a general expectation — even at Vestcor — that a properly executed absolute return strategy will generate a return in the area of four per cent per year, and both Schneeweis and Kolivakis say that is the benchmark Vestcor managers should be beating to win their bonus pay.

"I agree there should be tough questions asked about the benchmark returns of absolute return strategies not reflecting the risks they're taking," said Kolivakis.

Schneeweis agrees.

"They (management) have a tendency to say why they are great and it's up to the board of directors to get another point of view on why in certain conditions they aren't so great and where there may be a little puffery," he said.
On Tuesday, I was trading, looking at markets and researching my comment on CAAT Pension Plan when I received an email from Vestcor's CIO Jon Spinney asking me if we can talk about this article and my thoughts on asbolute return benchmarks.

I was taken aback because I spoke to this reporter on January 15th and forgot all about our conversation (he did email his article but it went to my spam folder).

When I read the article, I was surprised he took my blog picture and more importantly, I felt like he took things out of context so let me begin by sharing with you our email exchange which took place January 15th (click on three images to enlarge and read our exchange):

I want to begin with this exchange to put things in proper context because when you read the article you think to yourself: "There goes Leo, flying off the handle again about Vestcor, the benchmarks they use in absolute return strategies and the compensation they dole out to their senior managers based on bogus benchmarks."

In that sense, I really appreciate Jon Spinney being polite and reaching out to talk to me and bringing this article to my attention and let me put things in proper context (truth be told, I come across as a total arrogant jerk in this article so Jon could have harbored resentment toward me and never reached out).

In particular, I want to emphasize some things I stated in my email exchange:
  • On the specific issues you raised, there is no industry standard in terms of evaluating Absolute Return strategies (ie. hedge fund strategies) in a Public Market portfolio. The same goes for Private Equity and Real Estate in Private Markets.Benchmarks are all over the place but typically they involve a spread over public market benchmark to reflect liquidity concerns.
  • In the case of Vestcor, they seem to be doing what HOOPP is doing, focusing on three internal absolute return strategies based on fundamental, event-driven, and quantitative strategies. This is smart as it keeps costs low (no fees to external hedge funds). 
  • A benchmark of T-bills + 350 bps makes sense as I am pretty sure that Ontario Teachers' now uses a similar spread (returns have come down in arb strategies).
  • As far as compensation, overall I'd say they are in line and even on the low-end of their peer group (see here for details). 
  • I don't see conflicts of interest arising in this group if governance is solid. It's up to the Board to make sure comp is in line with the objectives stated and to be frank if they can consistently achieve 5%+ returns with low volatility in this portfolio as it grows and do it using no external hedge funds (high fees, high potential conflicts of interest), that is a very good thing for the plans' stakeholders and beneficiaries
  • The benchmark for absolute return strategies should be T-bills + 350 bps or something comparable, not just T-bills. Still, the performance is good and their overall comp is on the low end.
Nowhere in the email exchange did I state the benchmark Vestcor uses for Absolute Returns is a "joke". I've learned over the years to be very careful and balanced with my comments because I tend to put my foot in my mouth sometimes and as I told this reporter, I don't know Vestcor well enough to make detailed comments about the benchmarks they use.

Now, I'm not saying I didn't speak with Mr. Jones or accusing him of lying but he certainly wrote a very slanted article and took my comments out of context to write a hack job on Vestcor (read the comments at the end of his article, of course, the public is pissed!!).

He's right about one thing, I'm a stickler for benchmarks, and every time I see any manager trouncing their benchmark by a very wide margin in any investment activity, my antennas go up because it typically means they’re taking risks which aren’t reflected in the benchmark.

I have written very terse comments in the past about why it's all about benchmarks, stupid!, demystifying pension fund benchmarks, and why we can't properly compare pension funds.

In fact, my two first blog comments back in 2008 were about the ABCPs of pension governance and alternative investments and bogus benchmarks.

I had real issues with PSP's bogus real estate benchmark back then. I vividly remember a Board meeting when I was working at PSP in 2006 where then board members Carl Otto and Jean Lefebvre looked me straight in the eyes and asked me if the benchmark PSP is using for Real Estate reflects the risks of the underlying portfolio.

I froze, looked at Gordon Fyfe who told me: "answer the question". I then looked at Carl and Jean and Paul Cantor who was the Chair of the Board and said: "No, the Real Estate group takes a lot of opportunistic risks which is why they're posting 30%+ gains annualized and the benchmark of CPI + 500 basis points doesn't reflect the risks they're taking."

André Collin who was then head of Real Estate was at that board meeting, and let me tell you if looks can kill, I was dead on the spot. Let's just say that was the beginning of my downfall at PSP because I had a target on my back from that day on.

But I did my job, was put on the spot, and answered truthfully. I had gone head to head with board members on other issues in terms of adding commodities as an asset class (I was vehemently against it) but in the case of the Real Estate benchmark, I was in total agreement with Carl Otto and Jean Lefebvre, it was and remains too easy to beat.

Now, there is a background story as to why PSP uses this benchmark for Real Estate. At that board meeting, after I spilled the beans, I was asked to leave the boardroom for five minutes. I went outside, heard some shouting and screaming, and when I came in, Carl and Jean abstained from the vote on whether to maintain the CPI + 500 bps as a Real Estate benchmark (it was a golden handshake between André Collin and Gordon Fyfe which is why that benchmark survived that vote).

Nowadays, most large pensions use CPI + 500 bps as a real estate benchmark but the difference is they're mostly buying AAA real estate investments, not hotels and other opportunistic real estate investments to trounce their benchmark (with more risk).

Even PSP's Real Estate style has changed considerably since André Collin departed that organization to join Lone Star where all he does is focus on opportunistic real estate deals all over the world to help John Grayken become even richer than he already is.

I have nothing against what Collin and Grayken are doing, all the power to them. Lone Star has delivered incredible returns for its clients over the years engaging in opportunistic real estate deals (relatively quick flips). There is nothing wrong with this, that's what Grayken loves, that's why he hired André and eventually made him president of his firm (it also helped that André invested billions with Lone Star while working at the Caisse and PSP).

But when you're working at a public pension fund, I have an issue with people gaming their benchmark, especially in private markets where things aren't always straightforward when it comes to benchmarks.

Somebody told me that Ontario Teachers' has a "Benchmark Committee" steered by its CEO, Ron Mock, and is made up of him, the CIO and Barbara Zvan, the head of Strategy & Risk. This committee makes sure nobody is gaming their benchmark in any investment activity.

I asked him why doesn't anyone from the Board sit on this committee and he replied: "The Board approves the benchmarks but it's up to management to make sure they are strictly adhered to in terms of risk. If management doesn't do its job, the Board can change the benchmark and even fire the CEO."

Good point. This person also told me that CPI + 400 or 500 bps is a fine benchmark to use in private markets and most deals aim to ensure CPI + 700 to have an "extra cushion". He added: "Private markets aren't liquid, there is a lot of time and energy involved in deals, so it's ok to want an extra premium over benchmark in deals."

As far as the risk, he stated: "The biggest risk in private market deals is permanent loss of capital but if the compensation is structured over a four or five-year rolling return period, the manager is aligned with the organization's objective not to take excessive risk by gaming the benchmark."

That is an important point, there are no perfect benchmarks in alternative investments, you want pension fund managers to take risk but not to go crazy and risk losing a ton of money on any given year. If the compensation is structured to primarily reward long-term performance, you can do away with a lot of these private markets benchmark gaming issues.

And remember, benchmarks can be gamed everywhere, including public markets and hedge funds, it's not just a private markets problem. If a manager is taking excessive or stupid risks, be it liquidity or leverage or whatever, it should be reflected in their benchmark. Period.

Anyway, as far Vestcor,  I apologize if my comments came off as arrogant and spiteful, that certainly wasn't my angle when speaking with Mr. Jones of the CBC.

I honestly don't know Vestcor's operations well enough but after speaking with Jon Spinney, I don't think they're gaming their benchmark nor is it easy to get the full bonus in their internal absolute return strategies, a portable alpha strategy which adds value and lowers overall risk in equities.

Yes, maybe they should use some spread over T-bills or better explain the benchmark and how it ties into long-term results and compensation but I don't think anything sinister is going on here, they just need to better communicate their results and how it ties into compensation (you can read the 2016 Annual Report here for more information).

My comments and those of Thomas Schneeweis are still valid for thinking about benchmarks for alternative investments but my comments were taken out of context here to make it seem as if Vestcor is run by a bunch of clowns who are gaming their benchmark in absolute return strategies, and that simply isn't the case.

I hope this comment clarifies things and I've learned my lesson, always be very careful talking to reporters, they all have an angle, an axe to grind and you don't always know what it is (a friend of mine warned me, reporters always have an angle before writing an article and they’re just looking for quotes to corroborate their angle).

Below, Barry Sternlicht, Starwood Capital Group chairman and CEO, provides insight to the real estate market and where he is seeing opportunity. Great discussion, listen to his views.

Tuesday, April 24, 2018

CAAT Pension Gains 15.8% in 2017

At the end of March, I discussed how the Colleges of Applied Arts and Technology (CAAT) pension plan’s funded status reached 118%, the second largest funded position right behind the Healthcare of Ontario Pension Plan (HOOPP) which has a funded status of 122%.

At the time, CAAT's 2017 Annual Report wasn't available but it came out yesterday and it is available here. Take the time to read it, it's excellent, well written, concise and very transparent.

I have already covered CAAT's funded success and the success of the Plan is derived from the factors below (click to enlarge):

In this brief comment, I want to focus on CAAT Pension Plan's investment success. The CAAT Pension Plan’s assets reached $10.8 billion at December 31, 2017, compared with $9.4 billion at the end of 2016.

The Fund returned 15.8% net of investment management fees in 2017, outperforming its policy benchmark by 3.5% (click on image):

The Plan has experienced steady growth in assets over the last ten years (click on image):

I had a chance to briefly speak with Julie Cays, CAAT's CIO, on the sources of returns in 2017 (click on image):

Julie was sick and is home recovering but was kind enough to quickly go over some points. First, have a close look at the returns and benchmarks for each asset class (click on image):

As shown above, there was a strong performance in Emerging Market equities, Global equities (see footnote), Private Equity and Real Assets.

It was a solid performance all around and the overall results place CAAT at the top of the Canadian pensions I cover in terms of performance in 2017.

Julie shared a few points with me:
  • They typically don't make big tactical calls. She told me they went overweight credit in 2009 and 2011 but rarely make big tactical decisions.
  • They are increasing their co-investments in Infrastructure and Private Equity, cutting fees and leveraging off their relationships with external managers as much as possible.
  • They use portable alpha in their US portfolio and invest in two big hedge funds, Bridgewater's Pure Alpha Fund and BlackRock's Fixed Income Fund. Again, they leverage off these relationships as much as possible.
  • CAAT's governance is the key to taking active risk over a long investment horizon.
Julie and I also spoke briefly about membership. As shown below, CAAT has some of the same demographic challenges as other plans (click on image):

Julie told me they are in the process of gaining new members and I think this is a great plan to join.

I thank Julie for taking the time to speak with me and think she and her small team did an outstanding job delivering incredible results in 2017.

I recommend you all take the time to read CAAT's 2017 Annual Report here. Below, I embedded some of the highlights from the year in review.

Monday, April 23, 2018

OPTrust's Innovative New Pension Initiative?

Martha Porado of Benefits Canada reports, OPTrust launching new defined benefit pension plan:
The OPSEU Pension Trust is launching a new defined benefit plan for employers in the broader public sector, charitable and not-for-profit industries.

OPTrust Select will target employers that currently don’t have a defined benefit plan but may provide a capital accumulation program. With employers and employees contributing three per cent each, the plan will provide for an annual pension accrual rate of 0.6 per cent of earnings. Earnings upgrades and cost-of-living increases will be dependent on the plan’s funded status and annual board approval.

“We believe that there is a retirement income crisis in Canada and it is growing,” says Hugh O’Reilly, president and chief executive officer of OPTrust. “What we have and what our members have, we want others to have.”

For the first two years of the plan, employers will also have to contribute an additional 0.2 per cent. “If an employer were to become insolvent, we want to make sure there is security for the benefits they are providing,” says O’Reilly.

O’Reilly notes the move will also benefit the Ontario Public Service Employees Union pension plan because having risk and operational costs spread out over a broader membership base over the long term will provide enhanced sustainability. “We have a demographic issue; we have one active member for every inactive member,” says O’Reilly. Spreading that demographic issue across a broader number of members will be a significant benefit to both plans, he says.

The guaranteed income a defined benefit plan provides has a real effect on the quality of life for retirees, O’Reilly added. “Perceptions govern behaviours. People worry, they fear they are going to outlive their money. So then what happens? They don’t eat as well. They worry more and then they don’t do things like fill their prescriptions,” he says.

While no employers have joined the new defined benefit plan yet, OPTrust has been in conversations with different organizations, according to O’Reilly. “We would expect, over the next several months, to have several employers and organizations on board.”

Combined with the Canada Pension Plan and old-age security benefits, the plan aims to provide a 50 to 60 per cent income replacement rate for someone who makes between $50,000 and $60,000 a year. “The critical thing is if people know they have some guarantee, they will have a better retirement experience,” says O’Reilly.
OPTrust put out a press release on Friday, OPTrust Select marks the first new jointly sponsored, defined benefit (DB) product offering for modest income earners in a generation:
OPTrust, one of Canada’s largest defined benefit pension plans today announced the launch of OPTrust Select, which will offer a secure retirement solution at a moderate cost for both employers and employees.

“Research shows that people with a defined benefit pension lead a more fulfilling retirement and in doing so, make greater economic contributions to their communities,” said Hugh O’Reilly, President and CEO of OPTrust. “OPTrust Select brings the advantages of our large scale and investment expertise to more Ontarians who otherwise wouldn’t have access to a DB plan and a secure retirement.”

OPTrust Select will provide members with a steady stream of secure, reliable retirement income and includes the following features:
  • Members contribute 3% of earnings and employers match the contributions *see backgrounder for more information;
  • An annual pension accrual rate of 0.6% of earnings;
  • Earnings upgrades and cost of living increases, dependent on the Plan’s funded status and annual Board approval.
OPTrust Select is targeted to Ontario workplaces in the broader public sector, charitable and not-for-profit groups that do not have a workplace DB pension plan but may have a defined contribution (DC) plan, a group RRSP or no retirement savings arrangement at all.

OPTrust Select will also benefit the OPSEU Pension Plan by creating greater sustainability over the long term through the allocation of risk and operational costs over a broader membership base.

About OPTrust

With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

BACKGROUNDER (click on image)

Membership Eligibility
  • Membership is limited to workplaces in the broader public service (BPS) and Ontario not-for-profit sector
  • Employers can participate in only one schedule of benefits at OPTrust
  • Employees can participate in only one schedule of benefits at any given time
  • Employers and employees participating in the pre-existing schedule of benefits of OPTrust are not eligible to join OPTrust Select.
For more information about OPTrust Select, please visit our Questions and Answers page.
On Friday, I had a chance to speak with Hugh O'Reilly, OPTrust's CEO, on this exciting new initiative the organization is undertaking to expand coverage of DB pensions to Ontario workplaces in the broader public sector, charitable and not-for-profit groups that do not have a workplace DB pension plan but may have a defined contribution (DC) plan, a group RRSP or no retirement savings arrangement at all.

Hugh began the conversation by telling me he is a lawyer who worked at Bob Rae's government on pension policy. From the minute he arrived at OPTrust in 2015, one of his strategic goals was to expand coverage of defined-benefit (DB) pensions to Ontario' broader public sector and non-profit organizations.

Hugh began by citing the HOOPP - Gandalf Group study on the emerging retirement crisis in Canada as supporting the case to fill a much-needed void.

Now, it should be noted that not everyone agrees with the HOOPP - Gandalf Group study and its implications. I know a few smart actuaries that think this study distorts the reality that there isn't a retirement crisis in Canada and the poor aren't starving in their golden years because of guaranteed income supplements.

They might be right but there is a crisis going on in the sense that most Canadians aren't saving enough for retirement, when they do save they don't have a clue about how to properly manage their savings so they can earn a decent yield and not outlive their savings, and many are falling through the cracks, adding to their retirement angst.

Rob Carrick recently asked a question on Twitter to which I replied somewhat seriously and jokingly:

Look at shares of Bell Canada which trade in Toronto and the NYSE. They have been sliding  since December as rates backed up, clobbering 'safe' dividend stocks (click on image):

Someone looking for income might love Bell's 5% dividend yield but if they bought shares in December, they're hurting from the capital loss and receive less in dividend payments.

That's the problem with dividend stocks, nothing guarantees shares won't slide or tank and nothing can guarantee the company won't cut the dividend if things get really bad.

In the case of Bell, I think it's safe to assume there will be no cut in the dividend, it has a virtual monopoly in Canada, the company is well run (not perfect by any stretch), so maybe you should be using any big sell-off to load up on its shares.

Still, there's NAFTA overhang, we don't know if US telecoms will come in to compete head on, rates might continue climbing higher and Bell's shares can continue sliding, just like those of Enbridge (ENB) and other Canadian dividend stalwarts. They've all been hit hard since rates backed up.

Now, as I told you on Friday, the market is worried about oil and rates, which is why I see opportunities in US long bonds (TLT) and overweighting consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweighting cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

But I'm not God, nobody knows what's going to happen in markets, which is why I stick to my recommendation to that 19-year old to put 60% into the S&P 500 (SPY) and 40% into US long bonds (TLT) over the long run, meaning over the next 40 years, avoid most mutual funds because they lag the market and fees eat up most of the return, and just rebalance their portfolio every year.

If it was a 55-year old or older individual, I'd recommend 60% to 70 % in US long bonds right now and try to ride out the storm ahead as best as possible but chances are they will not make a lot of money over the next decade, nowhere near what they made over the last 20 years.

Go back to carefully read my comment on why CPP is a great deal for Canadians where I stated all the advantages it offers:
  • The CPP pools assets and pools longevity and investment risk. This means individuals won’t outlive their savings like they risk doing with their RRSP or be unable to retire if a financial crisis like 2008 strikes and it clobbers their portfolio.
  • Also, CPPIB operates at arm's length from the government and is looking to maximize returns without taking undue risks. It can use its huge size to lower costs and hire smart people to manage assets internally across public and private markets all over the world as well as build solid relationships with world-class asset managers in public and private markets.
  • What this means, in effect, is that CPPIB’s long-term strategy to invest in a globally diversified portfolio across public and private markets ensures higher risk-adjusted returns over a traditional 60/40 stock bond portfolio. The value-added is significant over a long period and so is the lower volatility.
  • Importantly, the brutal truth on RRSPs and defined-contribution plans is they're not real pensions, they do not guarantee a secure pension payment for life because they are too beholden to the whims and fancies of public equity markets which are very volatile and will remain very volatile in a low-rate, low-return world. 
  • Lastly, the authors fail to acknowledge the benefits of Canada's large defined-benefit plans. They are directly and indirectly responsible for creating well-paid jobs and they ensure more people can retire securely, lowering social welfare costs and increasing revenues for governments. None of this is mentioned above.
This is why I have been a vocal proponent of enhancing the CPP for all Canadians, but even that's not enough.

Hugh O'Reilly, OPTrust's CEO, told me he's in favor of enhancing the CPP which is universal but over and above that, there is a need to offer DB pensions to people who are working and want to retire with peace of mind.

He told me he announced this initiative to OPTrust's employees on Friday and was greeted with "great enthusiasm and support".

For Hugh, it's a simple question: "Can we make the world a better place?". His answer is an unequivocal "yes" and it reminds a bit of that 60 Minutes clip going inside MIT's future factory where the professor who lost both legs from frostbite and invented amazing artificial limbs stated: "The best way to predict the future is to invent it."

OPTrust is rewriting the future of pensions. It sees a significant need for workplace defined-benefit pensions which companies have shed and it wants to offer its member service and investment expertise to address this need.

I spoke to Hugh about execution risk. He told me OPTrust's member service team consistently ranks among the best in peer reviews and there should be no problem onboarding and delivering great service, emphasizing "the success of this initiative depends on our continued investment success and ability to service new members and existing members to the highest level."

Hugh told me that OPTrust is the only large pension plan in Canada that is fully-funded and offers guaranteed inflation protection (OMERS also offers GIP but isn't fully-funded yet, close to it).

But the plan is suffering from a demographic shift as there is now one active member for each retired member and the burden of guaranteed inflation protection falls entirely on to active members.

This is where I interjected and asked Hugh: "Why not just do what Ontario Teachers' is doing, making the plan younger again by adopting conditional inflation-protection and more evenly spreading the risk across active and retired workers? HOOPP and others are doing the same thing."

Hugh read my comment and said this: "Toronto is the Silicon Valley of pensions, we all have demographic challenges, some more than others, but we have different ways of tackling these challenges. In our case, we want to maintain guaranteed inflation protection so we decided to get out and offer our services to new clients, broadening the base of the plan, increasing the ratio of active to retired members."

Will it work? That remains to be seen but my discussion with Hugh left me with the impression he's optimistic it will work and there is an interest in this initiative.

So being the consummate pension provocateur, I asked Hugh: "What if you are successful and others like OMERS who also want to maintain guaranteed inflation protection decide to compete with you, offering DB pensions to public and private sector organizations that don't offer adequate pension coverage?".

Hugh replied: "That's terrific, the more competition, the better, it means we're doing something right and more Ontarians will eventually retire with the peace of mind that goes with knowing they will have secure pension payments for life."

He's absolutely right, the more competition the better. I saw a need for this when I was working as a senior economist at the Business Development Bank of Canada (BDC) in 2008-2010 and told senior managers to create a defined-benefit pension plan for Canada's small and medium-sized businesses.

My call fell on deaf ears but to be fair, there were other more pressing needs at the time and pensions for all wasn't one of them (and the BDC doesn't have the expertise and infrastructure to offer DB pensions to its members).

But I do envision a future where Desjardins, the largest cooperative financial group in Canada, will be offering defined-benefit plans to its members (not variable benefit plans but real, DB plans).

And that's not all. Over the last year, I've noticed the big gorilla disruptor, Amazon, has taken a keen interest in my blog comments.

Oh would I love to sit down with Jeff Bezos and sell him on the idea that Amazon can totally and irrevocably disrupt financial services by offering millions of Americans and people around the world the retirement security they so desperately need (Amazon can set up pension offices n Toronto and Montreal and I would hire the best of the best at a moment's notice to manage assets across private and pubic markets).

Over the weekend I read an eye-opening comment on how Paul Ryan could get a pension of $84,930 a year—here's how that compares to most Americans.

We all know how politicians get the Cadillac of pensions but why not democratize this and offer it to everyone else and introduce some basic risk sharing or rules to ensure these pensions are sustainable over the long run?

OPTrust is taking the initiative on this need and I for one wish them great success in this endeavor.

I thank Hugh O'Reilly for taking the time to speak with me and think he's onto something big here, reinventing the future of workplace pensions. Others will surely follow.

Remember, the best way to predict the future is to invent it. If you build it, they will come.

In the case of DB pensions, if you make them accessible, people will jump on the opportunity to be part of a well-governed plan.