Friday, June 29, 2018

Jawboning the Fed?

Greg Robb of MarketWatch reports, It’s been decades since the White House has warned the Fed the way Kudlow just did:
It has been a long time —the early 1990s in fact— since a White House tried to influence Federal Reserve policy the way Trump economic advisor Larry Kudlow did on Friday.

In an interview with Fox Business Network, Kudlow jawboned the Fed, saying: “My hope is that the Fed, under its new management, understands that more people working and faster economic growth do not cause inflation.”

“My hope is that they understand that and that they will move very slowly,” he added.

It was the senior advisers to President George Bush, particularly Treasury Secretary Nicholas Brady, who pushed the Fed to cut rates at a faster pace in the run-up to the recession that lasted from July 1990 until March 1991.

In fact, Bush blamed former Fed Chairman Alan Greenspan for his defeat to Bill Clinton in 1992.

Financial markets were roiled by Brady’s warnings, said Lewis Alexander, chief economist at Nomura.

“The sense that the Fed was being criticized by the administration undermined the market’s confidence in the Fed’s ability to anchor inflation expectations,” Alexander said. This was reflected in higher interest rates.

In light of this experience, Robert Rubin, Clinton’s Treasury secretary, instituted the practice that administration officials should not comment of Fed policy.

This gentlemen’s agreement lasted, on the whole, through the George W. Bush and Obama administrations.

To be fair, most of this period Fed interest-rate policy during this period was trying to support economic growth, not take away the punch bowl.

The Fed is now attempting to slow the economy down with steady rate hikes but has said it will move at a gradual pace.

Robert Brusca, chief economist at FAO Economics, said Kudlow has probably notices that Fed Chairman Jerome Powell “has moved a little bit more to the side of the hawks than Yellen.”

Powell has signaled the Fed will continue to hike rates at a once-per-quarter pace, despite warnings from doves at the central bank that the market is signalling caution.

In particular, the yield curve has been flattening, with the spread between 2-year notes  and 10-year notes at the lowest level since 2007.

The curve is a line that plots yields across all debt maturities. It typically slopes upward. A flatter curve can signal concern about the outlook. An inverted curve is an accurate predictor of recessions.

Powell and other Fed officials have said that times are different and the yield curve may not be the signal it once was.

But St. Louis Fed President James Bullard on Thursday said he didn’t know why the Fed wanted to “test this theory” by continuing to push short-term rates higher.

Brusca said Kudlow was trying to “guide the Fed’s eyes” to the yield curve signal.

“I’m sure Larry was trying to send smoke signals. He’s trying to explain it to them,” Brusca said.
I agree with James Bullard, don't ignore the yield curve, but the Fed seems to think this time is different (it most certainly isn't) and it will continue to gradually hike rates as it wrongly focuses its attention on the rise in core inflation.

Meanwhile, outside the US, things are degenerating fast as the European yield curve just collapsed on reports the ECB is considering "Operation Twist" and the IMF just warned that global growth will fade.

And even within the US, there are plenty of reasons to worry. Thomas Franck of CNBC reports, Debt for US corporations tops $6 trillion:
The debt load for U.S. corporations has reached a record $6.3 trillion, according to S&P Global.

The good news is U.S. companies also have a record $2.1 trillion in cash to service that debt.

The bad news is most of that cash is in the hands of a few giant companies.

And the riskiest borrowers are more leveraged than they were even during the financial crisis, according to S&P's analysis, which looked at 2017 year-end balance sheets for non-financial corporations.

On first glance, total debt has risen roughly $2.7 trillion over the past five years, with cash as a percentage of debt hovering around 33 percent for U.S. companies, flat compared to 2016. But removing the top 25 cash holders from the equation paints a grimmer picture.

Speculative-grade borrowers, for example, reached a new record-low cash-to-debt ratio of just 12 percent in 2017, below the 14 percent reported in 2008 during the crisis.

“These borrowers have $8 of debt for every $1 of cash,” wrote Andrew Chang, primary credit analyst at S&P Global. “We note these borrowers, many sponsor-owned, borrowed significant amounts under extremely favourable terms in a benign credit market to finance their buyouts at an ever-increasing purchase multiple without effectively improving their liquidity profiles.”

The trend persists even among highly rated borrowers: More than 450 investment-grade companies not among the top 1 percent of cash-rich issuers have cash-to-debt ratios more similar to those of speculative issuers, hovering around 21 percent.

This could lead to trouble for the economy as interest rates rise. The Federal Reserve, which has already hiked rates twice so far this year, has indicated that further increases may be needed to keep the economy in check later in 2018. It has also actively reduced the amount of purchases it is making in the Treasury and mortgage markets.
I've repeatedly warned my readers that high yield (junk) bonds are the canary in the coal mine and if something goes wrong, investors need to prepare for a wave of defaults.

Lastly, take the time to read Chen Zhao's weekly comment at Alpine Macro, "Seven Steps and a Stumble". They point out that although both rising trade tensions and the Fed are to blame for the shakeout in global stocks, the Fed could be the more important and insidious reason for the spreading weakness in global stock prices.

This is why a few policy watchers are now jawboning the Fed to ignore inflation and go gently here.

Below, former US Treasury Secretary Lawrence Summers said Federal Reserve interest-rate hikes that slow the nearly decade-long expansion are a greater risk to the economy than inflation:
“Is the strategy one of relying on the Phillips curve and trying to preempt inflation, or is the strategy one of trying to let the economy grow as much as possible and respond to inflation problems as they arise,” Summers said in an interview Wednesday on Bloomberg Television. “I would very much favor the second.”

“The dangers are still much more on the side of too much slowdown than they are of too much inflation,” said Summers, a Harvard University economist and former White House adviser in President Barack Obama’s administration. “We still haven’t really solidly hit the 2 percent inflation target so I’m not seriously concerned about the Fed pursuing too easy a policy. If anything, the dangers are the Fed will pursue too tight of a policy.”
When it comes to the economy and Fed policy, you won't find a better economist than Larry Summers, everything he warns of here is absolutely correct.

Thursday, June 28, 2018

OPTrust vs BCI on Climate Change?

Benefits Canada reports, OPTrust sets out climate change action plan:
The OPSEU Pension Trust is setting out a climate change action plan, including eight areas of focus that aim to make the pension fund more resilient and agile in taking on the problem.

“Climate change is one of the most significant challenges facing us today,” said Hugh O’Reilly, president and chief executive officer at the OPTrust, in a news release. “As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests.”

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions. We are committing to build climate change risk into our investment approach, starting now.

The areas for action, which the OPTrust plans to implement over the next five years, include:
  • Continuing to drive for better disclosure of the information investors need to price carbon risk;
  • Collaborating with peers, regulators and companies in which it’s invested to achieve meaningful change;
  • Continuing to build awareness and alignment among investment professionals through education;
  • Defining a clear baseline to measure the plan’s exposure to industries and geographies that are at higher risk for climate change impacts;
  • Integrating an approach that considers the impact of climate risk on the fund and in its portfolio construction;
  • Focusing on achieving greater disclosure within its portfolio of companies and incorporating climate change-related metrics in the evaluation of new investments;
  • Driving for improved performance on environmental, social and governance issues and advocating for certainty in the regulatory environment; and
  • Continuing to publicly report its efforts in managing climate change risk.
Published earlier this year, the OPTrust released a report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, covering issues around governance, risk management, strategy and metrics and targets. The news release noted that the pension fund’s climate change action plan builds on these commitments and aims to lead to a better understanding of the risks and opportunities that climate change poses to its investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” said O’Reilly. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”
OPTrust put out a press release, OPTrust takes action on climate change:
Climate change is having profound impacts, and markets need to respond. It is vital for pension plans to measure the impact and manage risk, according to the Climate Change Action Plan issued today by OPTrust.

"Climate change is one of the most significant challenges facing us today. As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests,” said Hugh O’Reilly, OPTrust President and CEO.

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions,” O’Reilly added. “We are committing to build climate change risk into our investment approach, starting now.”

The Climate Change Action Plan contains eight areas for action that will make OPTrust more resilient and agile to meet the investment challenge. Among others, the areas for action include defining a clear baseline to measure the pension plan’s exposure, considering climate risk factors when assessing investments, and pushing for increased disclosure of climate change-related information from portfolio companies.

With its 2017 Funded Status Report, issued earlier this year, OPTrust became one of the first pension plans to report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommends disclosure in four areas: governance, risk management, strategy, and metrics and targets. The Climate Change Action Plan builds on these commitments, and will lead to a better understanding of the risks and opportunities climate change poses to our investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” O’Reilly said. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”

OPTrust's Climate Change Action Plan, along with the 2017 Responsible Investing Report and the responses to the TCFD recommendations included in the 2017 Funded Status Report, are all available at

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.
So what is this all about? Go back to read an earlier comment of mine, OPTrust taking climate change seriously, where I noted:
Hugh explained to me that OPTrust is taking climate change and responsible investing based on environmental, social and governance (ESG) factors very seriously and this was an effort to really drill down and holistically assess OPTrust's approach to responsible investing, a first of its kind in Canada to my knowledge.

Hugh began by stressing that this isn't about "divesting" from the fossil fuel industry. (OPTrust doesn't believe in divestments except for tobacco where it butted out for good and for good reasons. Instead, OPTrust believes in engagement along with its peers to force companies to take climate change seriously).


I also agree with Hugh O'Reilly's philosophy that the best way to impact change is by investing in the very industries we are concerned about, whether it's oil and gas, big pharmaceuticals or firearms.

What else did Hugh O'Reilly tell me? The focus on OPTrust is on funded status, not shooting the lights out in terms of returns. In fact, compensation of senior executives is focused on funded status and a portion of every employees bonus is related to this too. Hugh and Jim Keohane even wrote an op-ed on the need to place funded status front and center at all pensions.

This assessment on climate change doesn't change that focus, it emboldens them to be better in terms of responsible investing in order to better align their interests with those of their beneficiaries over the long run. Again, it's more complicated than simply divesting out this or that industry which is why I urge you to take the time to read the position paper here and the accompanying Mercer report here.
In other words, the focus at OPTrust remains firmly on keeping its fully funded status but as good stewards of capital, they also want to take the lead on climate change and start drilling down across their public and private market portfolios to understand their exposure to climate change and see if they can reduce those risks and improve returns.

I say "take the lead" but as Hugh admits in the press release, we're still in the early innings of a transition to a carbon-neutral economy, so there is a long way to go. Still, OPTrust is taking climate change very seriously and has laid the groundwork to focus on key areas of action.

In fact, Hugh O’Reilly posted this on LinkedIn: “Looking at our portfolio through this lens has identified that 7.6% of OPTrusts’s portfolio is invested in renewable energy and green real estate. This represents our direct investment in the transition to a low carbon economy.”

Importantly, this isn't "pie in the sky" environmental socialism. This is a major pension plan taking concrete, measurable steps to focus on how climate change impacts its portfolios and taking actions to rectify or improve their portfolios to reduce these risks and improve returns.

"Yeah but President Trump doesn't believe in climate change and walked away from the Paris Accord". It doesn't matter what Trump or anyone else thinks, OPTrust and many of its peers are uniting on this issue and have identified climate change as a real risk to their investments and they're taking steps to address these concerns.

Climate change is a very real concern for all of Canada's large pensions for a simple reason, it's a huge risk and can have a substantial impact on a pension's long-term performance.

Again, the investment managers at these large pensions in charge of responsible investing aren't there to smile and hug trees and protect wildlife, they have a very serious job to assess risks posed by climate change across all the portfolios and to recommend actionable ideas to mitigate those risks and improve long-term returns.

Lastly, while I'm on the topic of tree-hugging environmental socialists, I did notice the British Columbia Investment Management Corporation, now called BCI, is getting pummelled yet again in the media for fuelling the climate change crisis:
If you have a public pension in B.C., your retirement savings are likely fuelling the climate change crisis.

The pensions of over half a million British Columbians are administered by the British Columbia Investment Management Corporation (BCI), formerly known as the bcIMC. It’s the fourth-largest pension fund manager in Canada and controls one of the province’s largest pools of wealth, totalling $135.5 billion.

In 2016, Canada signed the Paris Agreement, acknowledging that global warming must not exceed two degrees Celsius above pre-industrial levels and further committing to work toward a 1.5 degree C limit. As one of the province’s largest financial managers, BCI’s investment decisions are critical for the urgent and sustained emission reductions that both targets require.

BCI’s holdings include investments in some of the world’s largest oil and gas companies.

To determine how it is responding to the climate crisis, our just-released report, Canada’s Fossil-Fuelled Pensions: The Case of the British Columbia Investment Management Corporation, asks: is BCI investing funds in ways that support the shift to a two degree Celsius global warming limit?

Unfortunately, the answer is no. We found that instead of curbing investments to align with the two degree limit, BCI promotes the status quo on carbon-heavy investments.

For example, BCI investments in Kinder Morgan rose to $65.3 million in 2017, nearly doubling its $36.7 million 2016 investment. Since 2016, BCI has over $3 billion invested in the top 200 publicly traded fossil fuel reserve holders. It is invested in 74 per cent of the oil and gas companies with the largest fossil fuel reserves and 30 per cent of the biggest reserve-holding coal producers.

BCI doesn’t believe these investments are a problem. It claims that its ability to be an “active owner” through shareholder engagement will create more lasting change in their investee corporations than if they withdrew or “divested” their money on ethical grounds.

We investigated BCI’s engagement strategies, including its shareholder voting history and collaboration with third-party organizations promoting responsible investment. We found that when it comes to climate action, BCI’s “active ownership” falls short.

Shareholder voting, also known as “proxy voting”, is one of BCI’s key responsible investment strategies, but in the context of climate change, is it effective? We found that companies often ignore climate-related shareholder resolutions and their eventual responses can be minimal at best. Exxon — which BCI’s holds an ownership stake in — claims that its business model “face(s) little risk” from climate change despite its commitment to blow past the two degree limit.

This is obviously an inadequate response to the scale and urgency of the climate crisis. By acknowledging the serious threats that climate changes poses, but only using shareholder engagement to address it, BCI is an obstacle to the transition away from fossil fuels which the two degree limit demands.

Not taking climate change seriously in its investment decisions not only breaches BCI’s claim to “responsible” investment on ethical grounds, it also threatens the financial stability of B.C. pensions.

A recent study published in Nature and Climate Change shows that falling prices in renewables and low-carbon technology means the demand for fossil fuel investments will drop before 2035, leaving companies with trillions in assets that cannot be sold. Last year the World Bank announced it would end financial support for oil and gas companies by 2019 and financial institutions around the world are following suit. Banking giants HSBC, BNP Paribas and ING recently announced they would end financing for greenfield oilsands projects, coal power plants and Arctic drilling projects.

If BCI committed to divestment from fossil fuels, it would join a host of institutions like churches, pension funds and state-owned investment funds that have pledged to fully or partially divest. Globally, over $6 trillion of investments have been declared fossil fuel free.

We have started moving towards a post-carbon world. Our report shows, however, that BCI is stuck in the 20th century of fossil-fuelled investment. As one of the province’s most powerful financial institutions, and the manager of most public pensions in B.C., we can’t afford to suffer the impacts of its choices.
Now, I'm going to try to restrain myself but when I read academic drivel by environmental zealots who clearly don't understand what they're talking about when it comes to pensions and climate change, my blood pressure shoots through the roof!

First of all, when you read stuff like "we have started moving towards a post-carbon world", be very weary of such nonsense. We are nowhere near moving towards a post-carbon world, and neither do I believe this is achievable over the next 100 years.

There will be incremental gains, renewable energy investments will grow by leaps and bounds because they still represent less than 5% of the world's energy sources.

More importantly, BCI is a pension fund which has a clear mandate to maximize total returns without taking undue risks. Fully or partially divesting from fossil fuels is an option but one that comes at a very high price (I know, retired hedge fund guru Tom Steyer thinks otherwise, but he's clueless too).

Again, pensions are not there to advance someone's social or environmental cause. Pensions are there to match assets with liabilities, period. If addressing climate change risks across portfolios can improve long-term returns, great. If not, then forget it. It's that simple.

I have a real issue with academics and environmental zealots peddling nonsense to call for divesting out of fossil fuels. Everything comes at a cost. Are the members of that pension plan willing to bear that cost (it's their money!)? Are governments willing to bear that cost (they contribute to these public pensions)? Are taxpayers willing to bear that cost through more taxes?

I've called out BCI for its toxic work environment but I have no issue with its investments in fossil fuels. BCI, like all of Canada's large pensions, is taking responsible investing very seriously and prefers corporate engagement over divestment as a means to influence companies.

Is it perfect? Of course not. None of these pensions are perfect and some are more engaged than others when it comes to climate change, but we need to stop peddling nonsense once and for all because it spreads myths about how these pensions are addressing climate change.

For all you environmental zealots mad at BCI, go plant or hug a tree, do whatever makes you feel good about addressing climate change but please stop publishing rubbish, it's embarrassing and shows how ignorant you really are about our large pensions and their mandate.

Maybe Gordon Fyfe should plant a tree and take a picture and post it on BCI’s website.

Alright, I'd better stop, I can feel my blood pressure climbing and it has nothing to do with Gordon.

Below, OPTrust’s mission is paying pensions today, preserving pensions for tomorrow. Listen to a discussion between Hugh O'Reilly and members of OPTrust. Listen to what matters most to them.

Wednesday, June 27, 2018

Is Your Pension Cyber-Secure?

The Canadian Jewish News reports, Fund invests $30 million in Israeli cybersecurity firm:
Claridge Israel, an investment firm founded by Stephen Bronfman and the Quebec Deposit and Investment Fund, is investing US$30 million ($38.7 million) in Cyberbit Ltd., a cybersecurity company based in Ra’anana, Israel.

Cyberbit, a subsidiary of the high-tech company Elbit Systems Ltd., was founded in 2015. It is described as a leading provider of cybersecurity training and simulations.

With this major new funding, Cyberbit will expand its sales and marketing, primarily in North America, boost product development and enhance customer and partner support, according to an announcement released on June 4.

Claridge Israel, which is based in Tel Aviv, was created in 2015, as a partnership between Claridge Inc., the private investment firm headed by Bronfman, and the Caisse, the Crown corporation that managers numerous public pension funds and insurance programs in Quebec, with the aim of finding business opportunities in Israel.

Oded Tal, the managing partner of Claridge Israel, will join Cyberbit’s board of directors.

The Caisse is one of the largest institutional investors in North America, with net assets of $298.5 billion.

Cyberbit is a pioneer in the use of hyper-realistic simulations to train cybersecurity experts. The company says there is a shortage of skilled people around the world who are able to manage cybersecurity threats. By 2021, it says that Cybersecurity Ventures predicted that 3.5 million jobs in the field will be unfilled, while the number and complexity of cyber attacks only grow .

“Elbit Systems sees the cybersecurity field as a growth engine,” stated Bezhalel Machlis, the company’s president and CEO.

Claridge Israel managing director Rami Hadar said that “Cyberbit’s growth in just three years has been remarkable. This growth is driven by a unique product portfolio that addresses several of the most pressing industry problems, a solid go-to-market strategy and a highly capable team that is executing successfully and creating a leadership position in several markets.”

Meanwhile, the Jerusalem Post reported that Israel Aerospace Industries (IAI) has teamed up with a Quebec-based company to produce surveillance drones for the Royal Canadian Air Force.

IAI and L3 MAS, which is located in Mirabel, Que., will make the Artemis Unmanned Aerial System (UAS), a medium-altitude, long-endurance system, based on IAI’s most advanced unmanned reconnaissance aircraft, the Heron TP.

“The Artemis UAS is uniquely positioned to assist Canada in preserving its national security and sovereignty interests at home and abroad,” according to an IAI press release on June 3.

“As the prime contractor, mission systems integrator, and ISS provider, L3 MAS looks forward to breaking new ground in Canada’s defense and aviation sectors with IAI’s Artemis UAS,” L3 MAS vice-president and general manager Jacques Comtois stated.
I find it interesting how the Caisse teamed up with Stephen Bronfman's Claridge fund to invest $30 million in this fast-growing Israeli cybersecurity firm, Cyberbit. You should look at the company's blog here, they have posted great resources on their site.

Today, I'd like to focus on pensions and cybersecurity. However, I don't just want to talk about pensions investing in cybersecurity firms but rather want to focus on pensions addressing cybersecurity threats.

There are quite a few papers and presentations on the net, including this paper from Allen & Overy and this NCPERS presentation from Ronald King of Clark Hill.

We live in an age of major cybersecurity threats. Every public and private organization needs a plan to address these threats.

I enlisted the help of a friend, Mike Petsalis, President & CEO of Vircom, a Montreal-based company focused on email security, to discuss the topic of pensions and cybersecurity. I'd also like to thank Robert Ravensbergen, Vircom's marketing manager for his help with this material.

Mike was kind enough to provide a short comment for my readers:
Cybersecurity is still terrifying, to the point where major media stories have not desensitized us to its risks. Equifax, Yahoo!, WannaCry, NotPetya and more attacks have all become terms common in the security lexicon, characterizing the mass and variety of risks that every organization faces large and small. While the perpetrators and method of execution for each attack may differ, both in major and minor ways, the methods to prevent or address them are fairly similar across industries, including with pension funds.

For instance, while the aforementioned attacks are all large-scale breaches or ransomware attacks spread through zero-day exploits (more on those later), over 90% of attacks start with a phishing email. Email and other channels are perfect fodder for social engineering attacks, which focus on attacking people rather than systems, manipulating them into sharing information.

That point being made, it’s better to consider a summary of cyber risks and what pension funds can do to address them before considering how organizations should prioritize their security decision-making. Because of the nature of pension fund organization – usually having a large number of members but a small number of employees handling a large amount of data and money for said members – there are certain kind of attacks or risks to which they can be most susceptible. These generally come in the form of social engineering attacks, but a large amount of risk is also present in the general likelihood of loss or mishandling of data and the need to quickly address instances where such breaches do occur.

What are the main cyber security risks pension funds face?

There are five primary risks that pension funds face in maintaining their cyber security.
  • Loss or mishandling of member data (especially protected data)
  • Loss, mishandling or espionage of data through social engineering attacks
  • Loss of funds or data due to social engineering attacks or cyber-enabled fraud
  • Accidental publication or sharing of protected or proprietary data
  • Malicious publication or sharing of protected or proprietary data by a bad actor
The loss or mishandling of data is a common concern for any business, but it is particularly critical to address for organizations that rely on trust and a good reputation. There are cases where this is malicious or out of a grudge, but without sufficient accountability, any employee can either collaborate with fraudsters or commit a fraud themselves. This risk doesn’t apply only to money handled by pension funds, but also the data which funds hold for their members, as data in itself can have tremendous value to fraudsters and other bad actors.

Beyond a fraud or data risk in which an employee consciously participates, the attacks in which employees are unwitting accomplices pose the greatest risk to an organization and are also far more common. This could be executing by spoofing a colleague’s email address in requesting funds or member information or compromising trusted accounts and jumping in on existing conversations. Access to and management of this information could be excessively high in situations where an encrypted email service isn’t being used for protected data, while impersonation attacks could also carry malware or spyware that compromises communications and data stored on an employee’s devices – both on desktops and laptops or on mobile. This is especially risky if a fund employs a BYOD (Bring Your Own Device) policy, where an employee’s personal activity could compromise organizational data or allow attackers to glean critical information – a fairly common tactic in cultivating a successful fraud.

The threats above usually involve some degree of intention, either by a malicious actor or employee, but risk is also present in employee inattention. This applies wherever data is accidentally shared, either on a one-to-one basis or published in a publicly accessible channel like a website or compromised piece of software. If you’re looking to fully address cyber security risks, limiting the potential for basic accidents is also crucial.

Cybersecurity solutions that Pension Funds can prioritize

Incidentally, as there are five primary risks that pension funds face, there are five primary solutions that they can also use to manage most of the risk they face in attacks
  • Protection against malware
  • Protection against social engineering attacks
  • The ability to encrypt transmission of protected data
  • Data-Loss Prevention technology to prevent accidental or intentional release of information
  • User education, training, awareness and authentication procedures that prevent loss or compromise of data or funds
The triumvirate of basic protection for your organization contains a good Firewall, a good anti-virus and an effective email filter. While rudimentary versions of these will protect against 90+% of viruses, spam and more conventional threats, today’s most dangerous attacks often leverage new iterations of malware or advanced social engineering techniques which require unique solutions that either use a varying combination of machine-learning, advanced threat intelligence and more to prevent against specific instances of attacks in an up-to-the-minute manner..

For instance, with a virus or piece of ransomware, certain identifying characteristics may be programmatically changes as they’re delivered, preventing a traditional anti-virus database from identifying them and containing them before infecting a device. The same tendency towards clever fraud can also be seen in email attacks, where a malicious URL may only have hostile content hosted after delivery, evading a traditional spam filter but failing to bypass a filter that features URL rewriting or some other form of Time-of-Click protection.

Encrypting email transmissions and incorporating Data-Loss Prevention techniques are otherwise useful for preventing both intentional and accidental loss of data by employees. Email encryption permits users to deploy a secure platform on top of an email system, containing the presence of data to only specified addressees and locations, minimizing the possibility of said data being compromised. Data-Loss Prevention, on the other hand, can be used to identify the movement of data, defining and blocking pre-defined or protected terms from leaving an organization, or simply encrypting it as it leaves. Enterprise DLP solutions will monitor and block all unauthorized data transmission, whether it’s through cloud apps, devices, storage channels, emails or web communications. Often prohibitively expensive, solutions like email filters can incorporate DLP specifically for email without the added risk, managing much of the risk, but not all of it.

Finally, while the user is the main source of risk for many of today’s attacks, the best way to turn the tables is to strengthen them as a “last line of defense”. This requires basic education on what not to do when presented with suspicious materials or requests, but examples of these requirements can be as basic as:
  • Not inserting found USB drives into their devices
  • Checking email headers for accurate email addresses (compared to addresses that could be used by imposters)
  • Double-checking unusual requests for funds or data via email with a phone call
  • Updating their device software and security tools as updates are released, ensuring security-related patches and improvements are always present
  • Listening to the advice of IT specialists, consultants and administrators when it comes to security (even if they do lecture from time to time)
Teaching patience and observational skill to users is a critical aspect of ensuring your organization is secure, and can be put in a constructive, conscientious framework, rather than being treated as a chore. Great examples are now present of tools that educate and inform users, rather than berating them for making mistakes. Wombat is one among many, but solutions aren’t always required, as tips and resources can be found that simplify things for your users. This quiz from Pew Research is a simpler way to get started.

Addressing a data breach

No system is perfect, and while most pension funds will not deploy broad or unique cloud systems which require some of the latest threat monitoring and management techniques, the solutions referenced above should be sufficient to stop the threats that are faced by relatively small-staffed financial organizations.

That being said, the primary risk or requirement incumbent upon a pension fund following any successful cyber-attack or fraud is disclosure. State laws in the United States usually place a limit of three days passing after a data breach for it to be disclosed, whether the loss or compromise of data constitutes a material or physical risk to customers or if any protected data is unaccounted for. Data protection requirements are also increasingly stringent in Europe and Canada, meaning that the ability to address a breach after its occurred is just as important as preventing one. In advising on a breach, organizations are expected to notify authorities and the public within the time period legally required by their jurisdiction, specifying what protected data may have been lost and what risks this could pose to those who’ve lost their data. This allows those who’s data is at risk to take action that further mitigates any negative impacts of a breach, while also limiting the liability of an organization that’s suffered a breach.

Addressing this risk effectively comes down to accountability. The EU’s GDPR requires the appointment of a “data protection officer” and the concomitant categorization of all data stored by an organization and its partners. This can be as simple as appointing an employee to devise and maintain an excel spreadsheet that simply lists whose data is stored where and for what purpose, which offers a resource that can then guide where vulnerabilities are present and where disclosures must be made. While most non-EU organizations might not necessarily want to follow GDPR if they aren’t compelled to, this model of internal accountability is actually relatively useful for any organization, even if they aren’t compelled to implement it by law.

Defining success with your cybersecurity strategy can be difficult – primarily because the absence of a data breach or successful attack doesn’t mean you’re adequately protected. However, trying to get the best value out of solutions, address common and fast-growing threats, and building conscientious employee behaviour are all the necessary elements most organizations need to confront the unexpected.
I thank Mike for sharing a well-written comment on pensions addressing cybersecurity threats.

Those of you who want to learn more about this topic should email Mike Petsalis ( or Rob Ravensbergen ( directly to learn more on how Vircom can help your organization be cyber secure.

Below, a clip from Blue Sky Pensions on how to keep your pension scheme safe. I also embedded a clip on Cyberbit Range, a simulation platform enabling organizations to establish and manage training and simulation centers for instructing and certifying cybersecurity experts.

Lastly, a clip from Vircom’s Email Security Threats Video Series. In this video, they discuss what spam, viruses and malware are and what risks they pose to your business.

Tuesday, June 26, 2018

OTPP and IMCO Beef Up Senior Ranks?

Rick Baert of Pensions & Investments reports, Ontario Teachers picks new CIO:
Ziad Hindo was named chief investment officer of the C$189.5 billion ($142.7 billion) Ontario Teachers' Pension Plan, Toronto, the plan announced Tuesday in a news release.

Mr. Hindo was senior managing director, capital markets at OTPP.

He replaces Bjarne Graven Larsen, who left the pension plan in April. Ron Mock, president and CEO, had served as interim CIO.

Also, Jo Taylor was named executive managing director, global development at the pension plan, according to the release. That position is new; the news release did not detail Mr. Taylor's new responsibilities. Mr. Taylor was senior managing director, international at OTPP.

Messrs. Hindo and Taylor will report to Mr. Mock.

An OTPP spokesman would not provide further details, including who will replace Messrs. Hindo and Taylor.
OTPP put out a press release which you can read below:
Ontario Teachers' Pension Plan (Ontario Teachers') is pleased to announce the appointment of two new members to its executive team. Ziad Hindo, a veteran investment professional who joined Ontario Teachers' in 2000, has been appointed Chief Investment Officer, effective immediately. In this role Mr. Hindo will be responsible for overseeing the Investments Division and overall investment portfolio. Mr. Hindo, who most recently led the Capital Markets department, will report to Ron Mock, President and CEO.

Jo Taylor, who has more than 30 years of experience in the private equity and venture capital industries, is being promoted to the newly-created role of Executive Managing Director, Global Development, effective immediately. Mr. Taylor, who most recently ran Ontario Teachers' international investment operations out of London and Hong Kong, will be responsible for elevating the organization's global mindset. He and Mr. Hindo will design and execute the pension plan's international investment strategy and presence. Mr. Taylor, who joined Ontario Teachers' in 2012, will report to Mr. Mock and will relocate to Toronto from London.

"These appointments clearly demonstrate the strength of our pool of talent," said Ron Mock, President and CEO. "Supported by their world-class teams, I am confident that Ziad and Jo will be very successful in advancing our investment strategy using a total fund approach and global mindset."
Here are my quick takeaways on OTPP's key appointments:
  • Following the departure of Bjarne Graven Larsen, a rigorous selection process took place to replace him and among the finalists there were a few excellent internal candidates vying for this top job.
  • The process was rigorous and included psychological exams, board interviews and more. It lasted a few months. All candidates had outstanding qualifications so it wasn't an easy decision.
  • Noticeably absent from the list of internal candidates was Barb Zvan, Senior Vice-President, Strategy & Risk and Chief Investment Risk Officer. It is my understanding that Barb did not express an interest in the CIO position most likely because she is aiming to become OTPP's next president and CEO.
  • In the end, Ziad Hindo was chosen to be the next CIO and this was an excellent choice. He is relatively young but his long capital markets experience will prove invaluable to Ontario Teachers' investment team. Moreover, he is very well liked internally and this move will help bolster the morale internally following the departure of Bjarne Graven Larsen whose management style clashed with that of many managing directors.
  • As far as Mr. Taylor's new position, that has Ron Mock written all over it. Ron continuously strategizes about the next 18-24 months ahead and he knows he needs someone solid and with experience to lead Teachers' Global Development. Jo Taylor was chosen for a very critical position because he will be responsible for growing Teachers' international investments across private markets and developing key relationships with partners all over the world.
Now, some may argue why didn't Ron Mock carry the title CEO & CIO given he has tremendous experience in markets and could have easily carried both positions.

My answer to that is Ron is fully dedicated to the CEO position and knows full well that Teachers' requires a full-time CIO who oversees all investments across public and private markets.

Ziad Hindo has big shoes to fill. Whether or not he was liked internally, Mr. Larsen is "brilliant" (Ron's words and I believe him) and he had tremendous experience at ATP. Moreover, his predecessors, Neil Petroff and Bob Bertram, were outstanding CIOs who really performed their duties exceptionally well at Teachers'.

Anyway, I'm sure Ziad will be a great CIO with a long future at Teachers'. Jo Taylor will also do well in this new role working out of London. They will both report to Ron who will be supervising them during this transition and beyond.

In other big moves, aiCIO reports, Jean Michel Named CIO of Investment Management Corp. of Ontario:
Jean Michael has joined the Investment Management Corp. of Ontario, which manages public pension plans, as its chief investment officer.

Michel, a 20-year pension veteran, steps into the role after two years with the $224.3 billion Caisse de dépôt et placement du Québec (CDPQ), which runs Quebec’s public pensions: a seven-year run as president of Air Canada Pension Investments; and more than a decade at Mercer consulting group. At Air Canada, he took its 14 insolvent pension plans and restructured them into a surplus position.

Known for his portfolio construction, Michel said he was looking forward to the challenge and building a “world-class organization” in the Ontario investment firm when he starts in July.

Although the Ontario management company manages C$60 billion ($45.1 billion) in assets, it is relatively new on the scene, founded in 2016. Like most Canadian pension plans, it operates independently of the government. Its first clients were the Ontario Pension Board and the Workplace Safety and Insurance Board. The fund grew to its current size in just a year. It is Canada’s ninth-largest financial institution.

Most of the fund’s money is in publicly traded equities (41%), fixed income and money markets (22%), and real estate (14%), according to its website. The rest is in diversified markets, private debt, private equity, absolute return, and infrastructure.
Jacqueline Nelson of the Globe and Mail had a more extensive article where I note the following:
Bert Clark, CEO of IMCO, said he was drawn to Mr. Michel’s experience in portfolio construction, which involves an analysis of a client’s liabilities and needs and how each investment made for them will contribute to their overall investment goals.

“Almost every investor will agree that that’s the most important thing you do is decide what you’re going to invest in. And yet if you look at the asset management industry, the time that’s spent on portfolio allocation pales in comparison of the amount of time that’s spent on outperformance in individual asset classes,” Mr. Clark said.

Mr. Michel will also build up more internal investment expertise at IMCO so that clients’ money can be directly put to work in asset classes such as private equity, infrastructure or real estate. This is already a significant departure for the two current clients, which outsourced the majority of their investments.

Because IMCO was not beholden to any legacy investment process, IT or other client-management systems, the fund has been building many of these functions from scratch, including hiring chief risk officer Saskia Goedhart from an Australian financial company earlier this year.
I've already covered IMCO, aka Ontario's new kid on the block.

Bert Clark is a smart guy and he hired another very smart person to help him manage this growing and important pension fund.

As I've stated before, Jean Michel did wonders at Air Canada's Pension Plan bringing it back to fully-funded status from a severe deficit (it was a disaster prior to his arrival). He basically followed HOOPP's principles and strategies to match assets with liabilities very closely and create as much alpha internally as possible to lower overall costs.

At IMCO, he will take that experience as well as the experience he had at the Caisse as Executive VP,  Depositors and Total Portfolio, to hit the ground running.

Given their relatively young age, Bert Clark and Jean Michel will be the dynamic duo to watch over the next decade as they ramp up investment operations at IMCO.

I sincerely wish Ziad Hindo, Jo Taylor and Jean Michel lots of success as they assume these new senior investment roles.

It's not going to be easy, the bull market is in its final stretch, the next ten years will look nothing like the last ten years, everything is fully valued if not overvalued, which is why these organizations are very lucky to have experienced and qualified staff in these senior investment roles.

Below, an older interview with Jo Taylor, OTPP's new head of Global Development, at the 2013 SuperReturn International conference discussing investing in Europe.

Friday, June 22, 2018

Another Dangerous Tech Mania?

A couple of weeks ago, Kellie Ell of CNBC reported, The tech sector now is reminiscent of the 1990s dotcom bubble:
Warning signs in today's tech sector are reminiscent of the dotcom boom of the late 1990s that eventually went bust, market veteran Jim Paulsen told CNBC on Friday.

The current "character and attitude of the marketplace" are similar to the belief then that "tech can't lose," said the chief investment strategist at The Leuthold Group.

"What I find interesting, is that there's been significant narrowing of participation in the S&P 500 as these FANG stocks have really taken over," Paulsen said on "Squawk on the Street."

In 2013, Jim Cramer, host of CNBC's "Mad Money," popularized the term FANG, which stands for shares of Facebook, Amazon, Netflix, and Google, now part of Alphabet. More recently, another "A" was added to FAANG, representing Apple, and there's been talk about how to incorporate an "M" for Microsoft.

Excluding tech stocks, the rest of the S&P has consistently, since 2013, been underperforming, compared with the overall market, Paulsen said.

"You could argue the contemporary fascination with technology stocks has just completed an entire dotcom cycle," Paulsen wrote in a note to clients. "That is, for five years, tech has dominated the S&P marketplace which is surprisingly close to how long tech dominated during the dotcom run in the 1990s."

"I just wonder if it might end similarly," Paulsen told CNBC Friday. "Not to the same magnitude, but similarly."

The "dotcom bubble" from about 1995 to 2000, was a time of rapid growth in the equity market fueled by internet company investments. The bottom fell out in March 2000, which saw the Nasdaq, a index of with lots of tech stocks, lose nearly 80 percent of its value by October 2002.

Larry Haverty, managing director at LIH Investment Advisors, said there are "a lot of warning signs" in the market right now, such as increased regulatory scrutiny in the tech sector.

"Eventually the law of large numbers is going to get [the FANG stocks]," Haverty said on "Squawk on the Street." "With Amazon, I think the demon is antitrust."

But Paulsen pointed out a clear distinction between today's technology sector and the 1990s is the Russell 2000. Within the small-cap index, he said, tech stocks are matching overall market performance, "rather than significantly outperforming it."

He added, "Unlike the dotcom in the late 90s, where both small-cap and large-cap stocks were far outperforming the average stock, that's not happening in the small cap universe."

If investors want to maintain a technology weight in their portfolios, Paulsen said, "Do it in small- and mid-cap stocks as opposed to the popular FAANG names."
This week, Stephanie Landsman of CNBC followed up, A dangerous dot-com era phenomenon is back and it's going to inflict pain, market watcher Jim Paulsen warns:
A new research note warns that too many investors are stuck in a losing trade reminiscent of the dot-com era.

The Leuthold Group's Jim Paulsen is behind the ominous call.

"More and more of the leadership stocks have been the more aggressive, high beta stocks and a lot of the defensive names have been left for dead. They've diminished as far as their size of the overall [S&P 500] index," the firm's chief investment strategist said Monday on CNBC's "Trading Nation."

Paulsen hasn't seen that phenomenon since the late 1990s when excitement surrounding dot-com stocks hit a fever pitch.

"I don't think it is nearly as severe as it was back then, but the culture is the same. The character is the same where everyone is going into the same, very narrow number of popular names," he said. "Really nobody is investing new moneys into the rest of the S&P."

He included a chart that shows a sharp decline in the number of people investing in S&P 500 defensive names since the bull market began in 2009 — noting that defensiveness is at a record low.

According to Paulsen, many investors are too exposed to trendy areas of the market such as big tech FANG, otherwise known as Facebook, Amazon, Netflix and Google parent Alphabet.

"You wonder if we do hit an air pocket, if we would break below those February lows sometime this year, who do you think is going to sell? It's probably going to be those popular names because that's all anyone has recently bought," he said.

Paulsen, who estimates there's a 50-50 chance see a 15 percent sell-off this year, is urging investors who are overweight big tech to take some profits.

"Maybe to pat yourself on the back, congratulate yourself for a great investment," Paulsen said. "Maybe buy a beat-up consumer staple or utility here or pharma stock today that no one is taking a look at, but sells at a much better value."
It's Friday, tech stocks have been on a tear since I wrote my comment back in February explaining why I thought it was another correction, not something worse.

Have a look at the daily and weekly chart of the S&P Technology ETF (XLK) over the last year and five years (click on images):

What do these charts tell me? They tell me that in the short run, there may be a pause in this tech rally but that's not a given because the longer-term monster move is still there, making new highs on the weekly and monthly charts.

Why are tech stocks on fire? There definitely are many crowded trades in the tech space as big hedge funds with billions under management are looking to buy the same big tech names.

Just go look at what top funds were buying last quarter to get a sense of how most of the big funds all clamored into big tech stocks during the sell-off in Q1. Facebook (FB) down? Buy! Amazon (AMZN) down? Buy! Netflix (NFLX) down. Buy, buy, buy! And so on and so on.

Just look at the 5-year weekly chart of Netflix (NFLX), it's alpready parabolic and the scary thing is it might go even higher even though I think it's getting extended here:

So what else is driving this renewed mania for technology stocks? Well, for one thing, earnings. Big tech stocks might have a high P/E but unlike the 1999 hope & hype, they're producing billions in earnings and literally look unstoppable, much like the US economy.

In fact, in his latest weekly comment, Trade Wars Means Fed Overkill, David Abramson of Alpine Macro notes the following on why a tech mania may be emerging:
Technology stocks have gone vertical both in absolute terms and relative to the broad market. Our view has been that this trend will lead to a rotation as other market leaders, such as energy, financials and global growth plays, emerge. Meanwhile, interest-rate sensitive defensive sectors like consumer staples, utilities, REITs and telecoms are overdue for a bounce.

This rotation makes sense, given relative valuations and our expectations of a bull market in commodities. However, the timing is far from clear. The odds are rising that a technology mania will develop on the order of the late 1990s bubble.

You will need to read David's fascinating comment at Alpine Macro (contact to get the details but he basically goes over why even though the tech sector is vulnerable to a correction, the long-term rally isn't over yet.

But there is another reason why many portfolio managers are buying large-cap tech stocks here, they're a defensive play on a slowing economy. In his interview with Consuelo Mack of WealthTrack, top-ranked portfolio strategist François Trahan of Cornerstone Macro explained the changing market leadership and why it’s predictable.

What François told me is we're at an inflection point where leading economic indicators have peaked, the US economy is slowing but it's still doing well, so portfolio managers see large-cap tech shares as part of a Risk-Off trade (go see my Outlook 2018: Return to Stability for why large-cap tech is a defensive play initially when leading indicators peak).

Will this tech rally last forever? Of course not, but it could last a lot longer than what we think. One thing François told me: "It will end badly and that's when defensive sectors and US government bonds will do well."

What if you don't like high-flying tech shares like Netflix? No problem, use the weakness in consumer staple shares (XLP) like Kraft-Heinz (KHC), Campbell Soup (CPB) or Procter & Gamble (PG) to ride out the latest tech mania if that is indeed what is going on.

Since the begining of the year, I've been recommending more stable sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) but this market only wants more tech (XLK) because it's transfixed on earnings growth and there's still a worry that rates are headed much higher, capping the performance of safe dividend sectors.

We'll see what happens, there might be another tech mania on its way driven by quant hedge funds and passive index funds but it's too soon to tell whether we're there yet.

I remember 1999-2000 like it was yesterday. I also remember 2008 like it was yesterday. Some things you never forget. This isn't 1999-2000 or 2008, at least not yet.

And while everyone is impressed with Netflix, check out the performance of some of these small biotech (XBI) shares like Madrigal Pharmaceuticals (MDGL) or Sarepta Pharmaceuticals (SRPT) over the last year (click on images):

Now, if only someone can tell me whether shares of Tesaro (TSRO) are finally bottoming out here and ready to rip much hgher and sustain their gains (click on image):

That's why they say "biotech is BINARY"! Don't chase these or any of the stocks mentioned in this post. I'm just trying to show you there's a lot more to this market than large-cap tech stocks.

Below, some stocks moving up on my watch list Friday afternoon (click on image):

And no, they're not just biotech stocks even though that is my primary focus. Again, don't chase these or any stocks, especially if you don't know what you're doing, you will get burned alive.

I can say the same for all those young Canadians buying pot stocks for their TFSA portfolios, the funny thing with momentum, it works well on the way up but when the floor gives out, OUCH!!

But nobody seems to care, lots of people are getting high on pot stocks. Enjoy your buzz brothers!

As for the rest of you, you can play momentum, chasing large-cap tech stocks along with those big quant funds taking over the world, just be careful, when the music stops, it's going to be brutal and you're going to wish you bought some Kraft-Heinz (KHC), Campbell Soup (CPB) or Procter & Gamble (PG) or good old US long bonds (TLT) to protect your portfolio from getting slaughtered.

Alright, enough already. Please remember to kindly donate or subscribe via PayPal on the right-hand side under my picture and show your support.

Below, Larry Haverty, LJH Investment Advisors, and Jim Paulsen, Leuthold Group, discuss the moves in the tech sector and where some analysts are seeing similarities to the dot-com bubble of the late 1990s and early 2000s.

Jim Paulsen of the Leuthold Group also discusses high-flying tech stocks, investors’ allocation and more with Courtney Reagan.

Third, Chris Harvey, head of equity strategy at Wells Fargo, told CNBC that tech could soon turn into the market's headache. "We're a little bit concerned about the tech trade," Mr. Harvey told CNBC's "Futures Now" on Thursday. "When we become concerned is when things become great and...when everyone's super positive."

Lastly, in an exclusive interview, top-ranked portfolio strategist François Trahan explains the changing market leadership and why it’s predictable. He speaks with WealthTrack's Consuelo Mack.

Listen carefully to François, I have learned a lot over the years reading his research at Cornerstone Macro and recommend it just like I recommend your read macro research from Alpine Macro. Make sure you read Dave Abramson's latest weekly comment, great stuff.

On that note, don't forget me, I'm not charging you a thing for my comments and appreciate those of you who donate and subcribe to show your appreciation. Thank you!

Thursday, June 21, 2018

BlackRock's Pan-European Pension Push?

Crina Boros of the Investigate Europe reports, How a US firm pushed for EU €2.1trn pension fund:
The European Commission is about to create a private pension fund, worth €2.1trillion - justifying their decision by pointing to the increasingly large and more elderly European Union population.

This arrangement, which was absent from the European Commission president's list of official top 10 priorities in 2015, will impact on some 240 million savers.

The PEPP (Pan-European Personal Pension Product) will be a private, portable, pension product across EU member states.

It follows an idea launched by the US financial services corporate giant BlackRock, the world's largest asset fund manager that built some two-thirds of its $6trn empire on pensions.

Headed by Larry Fink, BlackRock back in 2015 proposed the creation of a "cross-border personal pension fund".

BlackRock wrote, in a paper, that the EU should be "reviewing demand for, feasibility and key features of a cross-border personal pension vehicle as a means of empowering consumers to save more effectively for their retirement needs."

At that time, there was nothing similar in European law. Just over a year later, the commission started working on it.

The commission estimated that the EU's internal pension funds market could triple in value by 2030: from €700bn today, to €2.1 trillion.

These numbers transformed the PEPP into one of the commission's most ambitious projects.

Now the commission's proposal is on the table, pending approval from the European Parliament and the Council of the EU, representing member states.

But one member of the parliament's committee on economic and monetary affairs, Martin Schirdewan of the European United Left (GUE), is highly critical of PEPP.

"At the heart of this proposal are not concerns about pensioners' incomes, but only the possibility of opening up new opportunities for business for the financial industry", he said.

Result of lobbying?

There is no shortage of evidence that this was the top priority of BlackRock's lobby agenda in Brussels.

BlackRock president Robert Kapito talked about capitalising on European retirees' money in 2015. His company arranged more meetings with commission members than any of its competitors.

Since a mandatory register of meetings was put in place in 2014, BlackRock is recorded as meeting commission officials more than 30 times.

Larry Fink, BlackRock's CEO, again raised their European private pension fund idea in January 2017.

Speaking at a ceremony at the Frankfurt Stock Exchange, Fink seized the occasion to criticise an "over-reliance on state pensions" and used the demographic argument to justify the need for a private pension scheme.

He was not shy to say that people are living longer lives means that they can "work many more years to pay for their reforms", as he claimed that "strengthening the capital market and pension systems will be vital to Europe's economic future."

Months later, the commission's vice-president for the euro and social dialogue, Latvia's Valdis Dombrovskis, evoked the same anxieties when introducing PEPP at a European Pensions Conference, echoing Fink's Frankfurt comments.

"Europe is facing an unprecedented demographic challenge. Over the next 50 years the proportion of the working-age population is expected to double ... The so-called pension gap will increase the pressure on public finances," he said.

Additionally, Fink's conclusion in Frankfurt was that "retirement systems around the world have failed to prepare workers for the future". Dombrovskis' June speech argued the same point: state funding of pension schemes is something to review in the future.

"The pan-European Personal Pension Product is an important milestone towards completing the Capital Markets Union", Dombrovskis said in his June 2017 speech.

"Today we are proposing to lay the foundations for a single European private pensions market. We are presenting a new voluntary scheme to save for retirement, a Pan-European Personal Pensions Product, or PEPP," he announced.

Dombrovskis argument is in line with the EU's general policies. The European Semester and EU's country-specific recommendations tend to invite member states to make "structural reforms" in their pension schemes.

Its 2017 recommendations also targeted countries like Germany, Poland and Italy.

BlackRock discussed the PEPP further with the responsible directorate-general, for financial stability, financial services and capital markets union (FISMA) at least once, in October 2017. They also met with general director Olivier Guersent and Jan Ceyssens from the European Commission.

The commission told Investigate Europe that "FISMA had similar meetings with dozens of other PEPP stakeholders, which is normal, as we have tried to hear a wide range of stakeholders when drafting legislation. We also opened a public consultation to prepare the proposal, as usual, in which BlackRock was one of many entities to respond."

This idea - advocated by Blackrock since 2015 - had made it to the stage of a public consultation at EU level in the space of less than four years.

The suspicion that BlackRock's lobby has a special weight in Brussels was put to Guillaume Prache, director of Better Finance, the European Federation of Investors and Users of Financial Services.

"It appears that in 2017 BlackRock met several times with European commissioners while we did not have a single meeting with the commissioner responsible for financial services," Prache explained.


This criticism from BlackRock's European rival comes after the American giant was also chosen to manage the wealth of Europe's first cross-border private fund, an NGO called Resaver.

Resaver is different from PEPP because it targets only professionals like university researchers and scientists. It is based on contributions from employers (universities, laboratories, companies).

The PEPP will be a kind of retirement savings plan (PRP), based on individual savings that, for the first time, will have pan-European rules, tax benefits and common treatment.

Assigning BlackRock to manage Resaver's funds disappointed European fund managers. Resaver is the work of Portuguese Research and Innovation commissioner Carlos Moedas and is funded at €4m by taxpayers via Horizon2020, the biggest EU research and innovation programme.

"It is somewhat surprising that the first public experience with a pan-European pension scheme has been granted to a US company when there are large financial asset managers in Europe," says Prache. "It is a sign of the success and efficiency of its lobby".

A European Commission product, Resaver includes pensions from the Budapest Central University, the Elettra Synchrotron of Trieste, the Italian Institute of Technology, the Fondazione Edmund Mach, the Vienna Technical University and the Association of Universities of the Netherlands, among others.

When Blackrock signed the contract with Resaver in Budapest, its director Tony Stenning tagged the new European pension scheme as a "one-time evolution", adding that "it will not be the last step" for Europe's pension market growth.

BlackRock's British hirings

This last sentence was, in some ways, premonitory.

Stenning was speaking in October 2015, many months before the plan for the creation of PEPP was known. But at that time BlackRock had other means of knowing in detail the evolution of related European decisions.

In 2015, months before gaining managerial powers over Resaver, BlackRock had hired the British civil servant, Rupert Harrison, as its new "head of macro-strategy", after convincing him to leave his job as chief of staff serving under the UK's chancellor of the exchequer, George Osborne.

Harrison had been the chief architect of the 'pension revolution', a grand project designed by David Cameron's Conservative-led coalition government.

This "revolution" - a termed also used by Osborne – open the doors to a market to which BlackRock, or, for that matter, other pension market managers, had not had access before.

After he stopped being chancellor in 2016, Osborne accepted a payment of £34,109.14 from BlackRock Inc, for a speech he gave in November 2016, covering a declared hour of work, plus travel and accommodation.

Osborne then joined BlackRock later, in 2017 after PEPP was launched. By then, he had participated in decisions affecting BlackRock's industry as the UK's finance minister.

Osborne took this part-time corporate job - that pays an annual salary of £650,000 for four days a month - after new prime minister Theresa May preferred that someone else ran the Treasury. Osborne now also edits the London Evening Standard, in addition to several other roles.

Investigate Europe asked BlackRock why they had hired both Harrison and Osborne. They referred to a statement issued to the Financial Times at the time of the hiring of Osborne, in which Fink said Osborne offered a "unique and valuable perspective on the issues affecting the world."

It added: "Understanding local market, policy, regulatory, technology, business and investment dynamics is integral to serving our clients and navigating our business. That is why BlackRock works with various senior advisers and strategists who bring a range of experiences in business, finance, academia and the public sector. We look for people who can offer our clients and investors a unique and valuable perspective on the issues that are shaping our world."

It offered no specific comment on Harrison.

In Britain, the US company has won public tenders to manage pensions connected to investment for county councils, the National Health Service, and public property funds. And this while the company holds a portfolio of real estate itself in the UK.

The US giant investor's business strategy has the power to influence competition rules and their impact in Europe. With its trillions of dollars, BlackRock buys significant parts of the largest companies in the world.

About two-thirds of BlackRock's financial muscle comes from pensions. After managing the majority of American pension funds, BlackRock has become a decisive shareholder in almost all key sectors in Europe: industry, banking, services, agri-food.

If this stakeholder couples with the influence of €2.1trillion held as European private pensions, who can tell what weight this company will have at the negotiation tables where Europe's economy is decided?

"BlackRock is a reflection of the retreat of the social state," says Daniela Gabor, a professor of economics at West of England University.

Investigate Europe asked BlackRock for an interview and submitted a long list of specific questions, including whether - since privatisation of pensions schemes in Europe was a divisive issue - they had taken this into account in their approach.

BlackRock declined the offer of an interview or to answer this specific question.
Now, before I begin my analysis, notice the left-wing conspiratorial tone of this article?

I can basically summarize this article very quickly. In four short years, BlackRock, the world's largest asset manager, has managed to lobby EU members to create the Pan-European Personal Pension Product (PEPP), a private, portable, pension product across EU member states.

And just like George Soros, Larry Fink is an evil, evil man trying to take over the world:

Alright, I'm being facetious, but sometimes I read these left-wing investigative journalists in Europe and wonder what planet they live on.

A couple of days ago I discussed the great pension train wreck going on in the United States and stated while the situation isn't dire yet, we are literally one financial crisis away from the point of no return.

In Europe, some countries have already experienced the great pension train wreck. In Greece, pensioners in the private and public sector took massive haircuts in their pensions.

The Greek pension system is basically a joke, nothing compared to what we have in Canada where the Canada Pension Plan Investment Board manages pension assets in the best interests of over 22 million Canadian beneficiaries.

Across Europe, pensions systems range from top-notch (Denmark, the Netherlands) to mediocre (Greece, Spain, Italy) with the UK and France somewhere in between.

So, here comes BlackRock and tells the EU what it already knows all too well, Europe has a massive pension problem and state pensions aren't enough to cover the future needs of many Europeans.

I think BlackRock is right and trust me, from the young Greek professionals I know in Greece, they'd rather have BlackRock manage their retirement savings than the Greek government and crony bureaucrats.

From what I understand, this isn't a pan-European defined-benefit plan, it's a pan-European savings plan which will be portable throughout the EU. In other words, it's in addition to the state pension EU citizens receive.

Of course, I would also like to see a pan-European defined-benefit plan and think BlackRock can spearhead this project too, a mega fund that invests in public and private asset classes.

Who would lead such a fund? Well, it can be Mark Wiseman, André Bourbonnais or BlackRock can bring in an outsider like Theodore Economou, the former head of Cern's pension fund who is now CIO of multiasset at Lombard Odier.

[Note: Theodore is very happy at Lombard Odier and is not looking to make a move. I'm just pointing out that there are very qualified individuals in Europe who have great experience in leading a pan-European defined-benefit plan or PEPP.]

Anyway, the point I'm making is conspiracy theorists abound when it comes to Larry Fink and BlackRock. Whether it's with CalPERS push for direct private equity or this PEPP product, everyone loves to question the motives of the world's largest asset manager.

Does Larry Fink want more business in Europe, Saudi Arabia, Asia and elsewhere? You bet he does and there's nothing wrong with that, he's running a business, not a charity.

But what if PEPP turns out to be a great success and helps hundreds of thousands of people in Europe to retire with more peace of mind? What's wrong with that?

Europe has a pension problem. The sooner it addresses it, the better off the Eurozone and global economy will be. The same goes for other countries, the pension problem can't be kicked down the road forever, at one point, we will all have to pay the piper.

The problem, of course, this is Europe and they can't seem to get anything right, including the EU pension fund which is on the brink of collapse.

Below, Larry Fink, chairman and CEO at BlackRock, joins BNN for a look at the dark side of globalization and what concerns him most right now. Listen to what he says about convincing Germans to invest in the sotck market over the long run. This is a great discussion.

And Nigel Farage slams critics demanding he refuse his EU pension. Well, don't worry about "Mr. Brexit", he's going to get his last laugh. In fact, he even recently enjoyed a jovial high five with Jean-Claude Juncker before the Brussels chiefs revealed plans to increase the EU’s seven-year budget to £1.1trillion (€1.25trn).

Unfortunately, many European pensioners who can only dream of the pensions these EU politicians will receive aren't laughing. They're very worried about what the future holds for their golden years.

So, whether it's BlackRock's PEPP or some other pan-European pension solution, something needs to be done or else the European pension train wreck will hit the eurozone very hard.