Friday, September 28, 2018

Investors in the Wrong Trade?

Stephanie Landsman of CNBC reports, Mayflower Advisors' Larry Glazer: Don't expect FANG stocks to keep carrying the rally:
Veteran fund manager Larry Glazer is worried too many investors are in the wrong trade.

His concerns stem from the crucial role big technology stocks are playing in the record rally. If investors don't diversify away from some of the year's biggest winners now, Glazer believes they're going to feel a world of pain.

"Ten names driving half of the return of the S&P 500 in the first seven months of the year. They want to hear that can continue because it's a neat and convenient story," the Mayflower Advisors managing partner told CNBC's "Futures Now" last week. "That divergence can't continue."

Glazer, who has almost $3 billion in assets under management, referred to Amazon, Microsoft, Apple, Netflix, Facebook, Alphabet, Mastercard, Visa, Adobe and Nvidia as some of the biggest names behind this year's index imbalances.

These so-called FANG [Facebook, Amazon, Netflix, Google] stocks are "not the U.S. economy," he added. "Investors need to make that distinction. They don't want to hear it."

The 'Honest Abe conversation'

He also suggested sentiment in the market was getting out of hand.

"Investors are starting to feel a little bit confident here. Maybe overconfident. Maybe almost little bit invincible. And, we're starting to see some laziness creep into investment strategies," said Glazer. "That laziness is precisely why at this moment we need the Honest Abe conversation."

It sounds like a pretty bearish argument. However, Glazer isn't classifying himself as a bear.

"It's not so much that we can't be bullish on the broad U.S. economy because when you look at jobless data, it's really strong. You look at GDP, it's strong. Consumer confidence [is at a] multi-decade high. All of those things are really bullish," he said. "It's really more a matter of the leadership of the market changing."

According to Glazer, investors should shift their exposure to value names, particularly groups that typically do well as inflation rises and the dollar weakens. He likes financials, energy and gold. Plus, he suggested hard hit emerging markets are showing signs of a bottom.

"You are starting to see emerging markets coming back. So, that global story is intact. The divergence is dissipating. That's what you really want to see to see the market go higher," he added.

His thoughts came as stocks rallied to all-time highs, with the Dow reaching its highest level since January 26.

"It's so convenient at a cocktail party to say 'I want to stick with the Nasdaq. I'll stick with the S&P. I don't want to know about anything else. Asset prices will go up. There will be no inflation,'" Glazer said. "It doesn't work that way. You got to get into the global picture."
There is no denying this market is being driven by a handful of tech (growth) names which is actually normal at this point of the cycle.

To understand why you need to read the research Francois Trahan publishes over at Cornerstone Macro. According to Francois, there are structural reasons as to why growth continues to outperform value and compositional issues as the value index now isn't the same as it used to be.

Also, it's important to remember he still sees return to stability and agrees with me that it's time to get defensive. But being defensive is exactly why investors are clamoring into a handful tech names where you see growth in earnings.

The risk, however, is that you get abnormally crowded trades where every fund looking to outperform is clamoring into a few tech names.

And it's not just big FANG stocks. Have a look at shares of Adobe Systems (ADBE), Advanced Micro Devices (AMD), Square (SQ) and Roku (ROKU) over the last year to get a sense of what's going on in the stock market:

I see momentum chasing momentum in a few names but the risks are high and a lot of investors chasing hot stocks are going to get their head handed to them.

Last week, I discussed why Ray Dalio and David Tepper think we're in the late innings of the economy and stocks.

This week, another hedge fund heavyweight, Ken Griffin, said that there are at least 18-to-24 months left in the market rally, thanks to the "giant adrenaline shot" of the US tax overhaul.

Everyone sees the end of the cycle but think about it, if the economy has 18 to 24 months left (I'm far more pessimistic), stocks should be rolling over before because they're a leading indicator.

What else happened this week? The Fed hiked rates for an eighth time and raised its economic outlook:
The Federal Reserve hiked its benchmark interest rate a quarter point Wednesday, upped its anticipation for economic growth this year and next, and provided a road map of what lies ahead through 2021.

As widely anticipated, the policymaking Federal Open Market Committee increased the fed funds rate 25 basis points. That now takes the rate to a range of 2 percent to 2.25 percent, where it last was in April 2008. This is the eighth increase since the Fed began normalizing policy in December 2015.

The funds rate serves as the baseline for multiple forms of consumer debt as well as savings accounts and CD rates. The funds rate increase will be felt immediately in the prime rate and increase credit card charges, but its impact in other areas usually is more incremental.

Along with the rate increase, the FOMC continued to project one more hike before the end of the year and three in 2019.

The Fed had kept its target rate anchored near zero from December 2008 until this hiking cycle began as it sought to bring the economy out of the financial crisis slump. Since then, the central bank has sought to normalize policy through consistent but gradual increases.
We shall see if the Fed continues to hike rates next year, it all depends on emerging market stocks (EEM) and bonds (EMB) which remain weak. If we get a negative shock there, watch out, it will be the end of the long bull market for a long time:

So far, there is no imminent threat but investors need to pay attention to what is going on outside the US because global contagion risk remains a concern which is why the US dollar (UUP) and US long bonds (TLT) are rallying of late:

Below, Mayflower Advisors’ Larry Glazer sees trouble lurking in the rally as stocks trade around all-time highs.

And Citadel's founder and CEO Ken Griffin says his focus right now is on "managing the tail risks of a major market correction" because we are late in the cycle.

When Ken Griffin tells you he's focused on managing tail risks, it tells you a lot about where you need to focus on right now, namely, on managing downside risk.

Have a great weekend and please remember to support this blog by donating or subscribing via PayPal on the right-hand side under my picture. I thank all of you who take the time to donate.

Thursday, September 27, 2018

OTPP Signs Tobacco-Free Pledge?

Benefits Canada reports, Ontario Teachers’ signs tobacco-free investment pledge:
The Ontario Teachers’ Pension Plan has signed an agreement promising to divest from the tobacco industry as part of a wider pledge supported by multiple global government and health organizations.

“Given the reputational, social and commercial headwinds facing the tobacco industry today, we are no longer confident that it represents an attractive investment opportunity for a long-term investor,” said Barbara Zvan, chief risk and strategy officer at Ontario Teachers’, in a press release. “Signing this pledge reinforces and institutionalizes our conviction that tobacco is no longer a sensible investment for our fund.”

The tobacco-free finance pledge encourages its signatories to commit to a tobacco-free policy within their investments. The aim is in line with the United Nations’ sustainable development goals and the World Health Organization’s framework convention on tobacco control.

The pledge, initiated by the not-for-profit Tobacco Free Portfolios, was launched at UN headquarters during its general assembly this week and is co-sponsored by the governments of Australian and France. Its founding signatories include firms with assets under management of US$6.4 trillion.

“I am delighted that Tobacco Free Portfolios has founded the tobacco-free finance pledge in partnership with global leaders,” said Dr. Bronwyn King, radiation oncologist and chief executive officer at the not-for-profit organization, in the release. “This initiative exemplifies the action required to achieve the sustainable development goals, and brings us closer to a tobacco-free world.”
Ontario Teachers' put out a press release, Global leaders launch Tobacco-Free Finance Pledge:
For the first time, finance leaders are joining world leaders from government and health today to launch The Tobacco-Free Finance Pledge.

The Pledge encourages signatories to consider the adoption of tobacco-free finance policies across lending, insurance and investment, in line with the United Nations' Sustainable Development Goals and the World Health Organization Framework Convention on Tobacco Control. The ultimate goal is to reduce the current annual death toll of 7 million people a year1 dying from tobacco-related illnesses. According to the World Health Organization, tobacco consumption is the single largest preventable cause of death.

This initiative was launched today at United Nations' Headquarters during UN General Assembly week, at a high-level side event co-sponsored by the French and Australian Governments, and featured many speeches, including from HRH Princess Dina Mired of Jordan; Ms. Agnes Buzyn, Minister of Solidarity and Health, France; Mr. Paul Blokhuis, State Secretary for Health Wellbeing and Sport, Netherlands; Dr. Tedros Adhanom, Director General of the World Health Organization; Dr. Vera Luiza da Costa e Silva, Head of Convention Secretariat, WHO Framework Convention on Tobacco Control; Ms. Annette Dixon, Vice President for Human Development at the World Bank Group; John Chiang, State Treasurer California; Jean-Laurent Bonnafé, Director and CEO, BNP Paribas; Denis Duverne, Chairman, AXA; Adam Tindall, CEO, AMP Capital and François Riahi, CEO, Natixis.

The Pledge was initiated by not-for-profit Tobacco Free Portfolios, with CEO and Radiation Oncologist Dr. Bronwyn King and her team developing The Pledge in collaboration with UN agencies and finance sector leaders AXA, BNP Paribas, AMP Capital and Natixis.

The Pledge was launched today with over 120 Founding Signatories and Supporters. They include financial institutions from around the world collectively representing trillions of dollars of capital, including assets under management of over USD 6.4 trillion, corporate loan books of over USD 1.8 trillion and insurance premiums of over USD 179 billion. Ontario Teachers' Pension Plan, with C$193.9 billion in net assets at June 30, 2018, also signed The Pledge today, and announced its adoption of a tobacco-free position.

The global financial community is recognizing the increasing commercial, regulatory and social headwinds facing the tobacco industry and the need to ‘denormalize' tobacco by ending all business and financial ties with this industry. The finance sector has long been a missing piece in tobacco control, treating tobacco as a ‘normal' participant in the global economy and financing the industry through lending, insurance and investment. This public declaration of support for tobacco-free finance, and the call to others to follow suit is a decisive step, highlighted by increasing momentum and change.

MSCI, the world's largest provider of environmental social and governance (ESG) indexes2 and research3 today announced the launch of a suite of Ex Tobacco Involvement Indexes. This suite of indexes will be a standard offering that is easily accessible, simple to implement and will keep the cost of adoption low, reducing hurdles to removing tobacco from both passive and active portfolios.

Moving away from financing tobacco is an issue now placed firmly on the agenda of boards of financial institutions across the globe.

2 By number of indexes and by assets tracking the indexes compared with publically available information produced by FTSE and S&P Dow Jones as of September 2018
3 By coverage of companies and by number of clients based on public information produced by Sustainalytics, Vigeo/EIRIS and ISS ESG as of September 2018


Founder of the Pledge
1. Dr. Bronwyn King, CEO and Radiation Oncologist, Tobacco Free Portfolios
"I am delighted that Tobacco Free Portfolios has founded The Tobacco-Free Finance Pledge in partnership with global leaders. This initiative exemplifies the action required to achieve the Sustainable Development Goals, and brings us closer to a tobacco-free world."

Collaborating Members
2. Thomas Buberl, Chief Executive Officer, AXA Group
"As a health insurer, we see every day the impact of smoking on people's health and wellbeing. At AXA, we want to help people to live in good health and contribute positively to society. In 2016 we were the first global insurer and investor to cease investing in and insuring tobacco, with the strong conviction that only a collective action can bring about change. This is why I am very proud to see today the strength of this collective Pledge."

3. François Riahi, Chief Executive Officer, Natixis
"We strive to make a positive contribution to all communities. This is our responsibility, and it is also the basis of our strategy to create sustainable value. As a stakeholder in the global shift to tobacco-free finance, Natixis is committed to supporting the efforts of public and financial players to work together and match our words with action."

4. Jean-Laurent Bonnafé, Director and Chief Executive Officer, BNP Paribas
"We're committed to financing economic development that has a positive impact on society. This includes action to ensure healthy lives for present and future generations. In this respect, we consider that the Tobacco-Free Finance Pledge is a milestone initiative. Having ceased our financing and investment activities related to tobacco companies, we are proud to be one of its Founding Signatories."

5. Adam Tindall, CEO, AMP Capital
"AMP Capital firmly believes in responsible investment and engagement to drive meaningful change in the community. Our tobacco-free position recognises tobacco is distinct with no safe level of use or opportunity for effective engagement. It reflects the changing attitudes of our clients who don't want to be invested in harmful products."

6. Fiona Reynolds, Chief Executive Officer, Principles for Responsible Investment
"Investors are becoming very concerned about increased regulation on tobacco products. This issue, combined with stakeholder uneasiness related to tobacco products, means that many are choosing not to hold tobacco stocks over the long-term."

7. Eric Usher, Head, UN Environment Finance Initiative (UNEP FI)
"We need wide-ranging action globally to achieve the Sustainable Development Goals and tobacco control is a clear example which can help meet 14 of the 17 goals. Finance must be part of the solution and The Pledge is a great step forward to achieving sustainable finance and a healthier society."

8. Butch Bacani, Programme Leader, UN Environment's Principles for Sustainable Insurance Initiative (PSI)
"As risk managers, insurers and investors, the insurance industry plays a key role in promoting good health and well-being. By signing the Tobacco-Free Finance Pledge, insurers are helping prevent the forecasted one billion deaths this century due to tobacco-related illness. Quitting is the only healthy and sustainable choice."

Tobacco-Free Announcement

9. Barbara Zvan, Chief Risk & Strategy Officer, Ontario Teachers' Pension Plan
"Given the reputational, social and commercial headwinds facing the tobacco industry today, we are no longer confident that it represents an attractive investment opportunity for a long-term investor. Signing this Pledge reinforces and institutionalizes our conviction that tobacco is no longer a sensible investment for our Fund."
I'm glad OTPP joined other large institutions and signed this tobacco-free pledge.

I've already covered why OPTrust butt out for good. On LinkedIn this week, OPTrust's President and CEO Hugh O'Reilly stated this:
"There is no such thing as a safe level of consumption of tobacco products and due to this reality, engagement is futile. Working with Dr. Bronwyn King, we took the decision to divest from public market tobacco firms."
It's important to understand something, Hugh isn't an advocate of divestments and they thought long and hard about this decision but he's right, engagement with big tobacco is futile and the cost to society of this industry alone far outweighs any cost of divesting from it.

And Barb Zvan, OTPP's Chief Risk Officer, is also right, the commercial headwinds facing the tobacco industry are enormous, especially in the developed world which is why big tobacco is focusing more on emerging markets where laws and regulations are lax.

By the way, the picture above features Barb Zvan along with Ontario Teachers' Chair Jean Turmel, Dr. Bronwyn King, and the honourable Malcolm Turnbull.

As for Dr. Bronwyn King, the Australian Financial Review just posted an article, Going tobacco free in the world of high finance and UN politics:
Fifteen years ago, Bronwyn King was a young radiation oncologist in Melbourne who was appalled by the ravages of tobacco affecting her patients in the hospital lung cancer ward. She decided to do something about it.

When she realised her own default superannuation fund was investing in tobacco companies, she had found her target – the finance sector.

That determination means Dr King will be standing at the United Nations in New York on Wednesday to promote "The Tobacco Free Finance Pledge" with 85 global financial institutions and combined assets under management of more than $US6 trillion ($8.2 trillion) as founding signatories.

Malcolm Turnbull had planned to be there as Prime Minister before his official attendance was cancelled due to circumstances beyond his control. So now he's turning up in his new capacity to speak as a private citizen at a joint Australian and French government sponsored event.

King tells The Australian Financial Review that the UN event being held at the same time as the opening of the general assembly is a "great way to give a global voice to an issue".

That global voice involves having representatives from governments and financial institutions in 18 countries also attending. From Australia, that includes QBE Insurance, First State Super, Mercer and AMP Capital. They are joining, among others, groups like BNP Paribas and AXA from France, ABN AMRO from the Netherlands, the Irish Sovereign Investment Fund, a Canadian pension fund, OP Trust, and the giant US pension funds CalPERS and CalSTRs.

Patient persuasion

California Treasurer John Chiang says he is proud to be one of the founding signatories on behalf of the $US90 billion State of California Pooled Money Investment Account.

"In California, public health programs are spending billions every year treating cancer, emphysema, heart disease and many other diseases linked to tobacco use," he tells The Australian Financial Review. "That's why I have made it a mission of mine to ensure not one dime, nickel, or penny of public money is invested in a product that kills our citizens."

Yet it's the personal drive of one female Australian doctor that has been the key to getting this gathering together. King, now 44, has managed this literally from her kitchen table, an unlikely headquarters for a registered charity, Tobacco Free Portfolios, she formally set up three years ago.

It's part of her effort to convince some of the world's biggest funds, banks and insurers to divest themselves of any investment options associated with tobacco. Not that King likes to use the term divestment. It sounds too confrontational for a woman whose style is one of patient persuasion behind the scenes. She's preferred to quietly head to corporate boardrooms rather that protest in the streets or at annual general meetings. She says corporate willingness to respond has accelerated, especially over the last five years.

"More than $US12 billion has already been shifted away from tobacco, and $1 trillion plus of Australian pension fund dollars is now tobacco-free," she says. "But I know numbers, and this is merely a fraction of what swills around our global financial markets. It's a great start but we have a long way to go."

Community responsibility

The most significant advance into mainstream Australian investing came in 2012 after King persuaded Michael Dwyer, chief executive of the large industry fund, First State Super, that the fund should get rid of investments, however minor or indirect, in tobacco. After a detailed analysis of whether this would be in members' interests, the fund agreed.

More importantly, she also used Dwyer's experience to get introductions to other super funds and industry conferences to sell the same message. That has now expanded to introductions around the world allowing King entree to many international financial institutions at senior levels.

And now many Australian super funds agree with her tobacco logic, she is hoping more banks will soon come on board. After all, Australian banks are clearly keen to demonstrate a sense of community responsibility in the wake of the royal commission.

Some companies will still be more concerned that banning tobacco investments will lead to calls for financial institutions to stay away from other investments, leading to a constantly expanding list of what's socially acceptable to activists.

Truly exceptional

Remember the decision by the Australian National University to blacklist seven resources companies on the distinctly dodgy advice of research group CAER a few years ago? Since then, environmental activism against the mining industry – particularly the coal and coal seam gas industries – has only become more powerful, sophisticated and effective. It ranges from protesters chaining themselves to gates or trees on mining sites to the broader divestment movement where groups, including banks, declare they are getting out of financing or investing in fossil fuels.

King sidesteps this by arguing tobacco is a truly exceptional product.

In her view, that is because tobacco has three key characteristics. One is that tobacco can never, ever be used safely. Another is that it has created a problem that is so globally significant that it's governed by an international treaty and sanctions. According to World Health Organisation statistics, seven million people will die this year due to tobacco, with 15,000 of them in Australia.

The other argument she poses to institutions considering her appeal is that using other potential tools as an alternative – such as greater engagement with tobacco companies – is futile and can create no meaningful change. There's no "improvement" possible.

King had planned to spend this week in Canada giving a speech at a medical conference – along with her husband, also a radiation oncologist. But it's in the world of high finance – and UN politics – where she now believes she can do her best cancer-prevention work.
I met Bronwyn in Montreal back in February when McGill University's faculty of medicine invited her to give a talk. She gave a great presentation and convinced me that pensions and other large institutions need to divest from tobacco.

If you want to know the number one global health scourge, look no further than tobacco. Nicotine in cigarettes is highly addictive which is why most smokers find it nearly impossible to quit and the list of chronic illnesses attached to smoking is long and is costing the world over $500 billion a year in health-related expenses (updated figures).

But big tobacco doesn't seem to care, its focus is squarely on emerging markets and the stocks of companies like Altria Group (MO) are performing fine for now and offer attractive yields:

Still, it's an industry which faces many headwinds and over long run, pensions would be wise to follow OPTrust, OTPP, CalPERS, CalSTRS and many others and divest from tobacco and invest elsewhere.

Below, Dr. Bronwyn King, radiation oncologist and CEO of Tobacco Free Portfolios discusses the need to eliminate tobacco companies from investment portfolios.

Dr. King has done wonders to bring this issue to the attention of large insitutions and I fully support her efforts and think all pensions should divest from tobacco as soon as possible. It's about time.

Wednesday, September 26, 2018

Strong Movement Towards Green Financing?

Claire Stam of EURACTIV France reports, Pension fund chief: We are seeing a strong movement towards green financing:
Investors increasingly have to take into account the legal risks associated with global warming and more and more of them are adopting a socially responsible approach, Phillippe Desfossé told EURACTIV France as Climate Week opens in New York.

Phillippe Desfossé is the chief executive officer of the pension fund ERAFP, which manages the additional retirement pension for French civil servants. He is also vice chair of the Institutional Investors Group on Climate Change (IIGCC).

Can you describe the organisation you are representing?

ERAFP is a pension fund which manages the additional retirement pension for civil servants. It is a mandatory pension scheme, which is capital-based and was established to benefit the 4.5 million civil servants, whether they are civilian or military officials, or employed by local government, hospitals or the judiciary. Having been established in 2005, the scheme allows civil servants to make contributions from all of their non-statutory income (any remuneration paid other than their index-related salary). These contributions are invested in assets (such as bonds, property or shares), which thereby cover the scheme’s commitments. Today, ERAFP manages over €30 billion. Having been set up 13 years ago, the scheme is only at the beginning of an increase in operations which will continue into the middle of the century. Understandably, its assets are growing: over the next ten years, the scheme’s cash-flow will enable it to invest €2.5 billion a year, on average.

Why did you choose 100% Socially Responsible Investment (SRI)?

We are seeing a strong movement towards green financing. Contributors are increasingly concerned about environmental, social and climate issues. This is either out of conviction or because of the risks and opportunities related to them.

More and more major investors are adopting an SRI (Socially Responsible Investment) approach. ERAFP’s board of directors produced our SRI charter when the scheme was established. For the directors, the pursuit of maximising short-term profit is contrary to the contributors’ long-term interests. ERAFP’s SRI policy is structured around three areas: social issues, governance and the environment. This is why the scheme is heavily involved in the fight against climate change.

Since climate change poses a risk to the pension fund’s assets (for instance, real estate capital on the seafront is exposed to the risk of a rising sea level), their only fiduciary duty should encourage them to measure the risks already present in their portfolios. It is likely that, in the near future, certain investors or funds who have not established any policy to assess, manage or even reduce the risks associated with climate change will be questioned in court.

Given its size, ERAFP implements a pragmatic SRI policy through the “best in class” management method. We invest in all sectors, without excluding any sectors. The objective is to retain the best companies in three areas: the environment, social issues and governance (ESG). For the last three years, we have also been measuring the climate risk of our portfolios.

What do you think about the European Commission’s initiative to promote green financing?

It’s something but we now need to change financing as a whole, rather than just promote green financing in addition to conventional financing. One of the challenges is to reduce the influence of short-termism on our decisions and to promote long-term investments.

Creating products with the “green” stamp is not sufficient in order to transform the system. Similarly, if every member state acts individually, this won’t make much difference. We need to go beyond national frameworks and, as soon as possible bring, about a systemic change which can mobilise considerable sums. It’s a matter of changing scale and, as C. Figueres said at the COP21, “to shift from billions to trillions”.

In this context, we have to mobilise the long-term resources of pension funds. Because of their mass, they can make an important contribution to this mobilisation. For example, in the Netherlands, the assets of pension funds exceed the country’s GDP.

Climate Week has just started in New York and follows on from the Global Climate Action Summit in San Francisco (12-14 September). What do you think about these meetings? In what way are they useful?

These meetings are very useful because they allow investors who are involved in green financing to organise themselves and coordinate – and therefore gain greater influence. When we are organised, green investment becomes a far more significant lever for action. ERAFP is part of the IIGC (Institutional Investors Group on Climate Change), which currently has 160 members and represents €21,000 billion in assets. When the IIGC intervenes at international summits or when its administrators meet national or European authorities, more attention is paid to it than to each of our organisations taken individually.
Very interesting interview and Phillippe Desfossé is absolutely right, in order to tackle climate change, you need scale and a long-term perspective.

I have been discussing climate change more and more on this blog. Michael Sabia recently sounded the alarm on climate change and Hugh O'Reilly also called for action to address it.

Unfortunately, pensions are slow to move on climate risk which is normal since they're slow to move in general.

I suspect in the future, there will be a lot more measuring of climate risk across the public and private market portfolios and a concrete action plan to address these risks. There will also be better reporting of these risks and on the performance of the green portfolios.

Still, pensions have a fiduciary duty to match assets with liabilities, not to focus on green investments except if they help in that goal. It's important not to get swept away in an environmentalist agenda when discussing pensions and climate change.

Below, California Governor Jerry Brown shares outcomes on the Global Climate Action Summit.

And China is the world's biggest polluter -- and now one of its largest producers of clean energy. Which way will China go in the future, and how will it affect the global environment? Data scientist Angel Hsu describes how the most populous country on earth is creating a future based on alternative energy -- and facing up to the environmental catastrophe it created as it rapidly industrialized.

Tuesday, September 25, 2018

Ontario's New Non-Profit Pension Plan?

Laurie Monsebraaten of The Star reports, Non-profit workers offered chance to join Ontario public sector pension plan:
As many as one million Ontarians who work for registered charities and non-profit organizations will be eligible to join the provincial government pension plan under an agreement being announced Monday.

The Ontario Nonprofit Network, which advocates on behalf of the province’s 58,000 charities and non-profits, is recommending OPTrust as the sector’s first defined-benefit pension provider.

The new OPTrust Select plan will be available to every registered charity and non-profit in Ontario, whether it has one employee or hundreds, said the network’s executive director, Cathy Taylor.

Everything from non-profit arts and culture organizations, daycares, sports and recreation facilities to health and social service providers will be invited to participate.

“Hardly anyone in the sector has benefits or pensions, and our research has found this has become a significant recruitment and retention issue,” she said. “So this is a really exciting development that will help to create decent work and encourage the next generation of workers to build careers in the sector.”

OPTrust is “thrilled … to be helping those who do good, do well in retirement,” said Hugh O’Reilly, president and CEO of the organization that manages the pension for Ontario’s unionized public sector employees.

“People in non-profit organizations work tirelessly to support and strengthen communities, and they deserve to know their retirement is secure,” he said in a statement.

Although the network worked with OPTrust as it developed the pension, it won’t play any formal role in running the plan.

Taylor said the network is not recommending a retirement income plan for non-profit workers launched last spring because the money isn’t locked in and benefits aren’t determined in advance, as they are with a defined-benefit pension.

“But one size doesn’t fit all. The sector is very diverse — there are self-employed artists working for non-profits and charities and a whole bunch of small organizations and individuals for whom that plan might be the best route,” she said.

“But for most workers, a defined pension is the gold standard. And we’re happy to be recommending one that we think is affordable for both employers and employees.”

Under the plan, employees will contribute 3 per cent of their salary — about the price of a daily cup of coffee for most in the sector — and employers will match it.

The pension is portable, so workers who change jobs to another Ontario non-profit will be able to bring their pension with them. And both full- and part-time employees are eligible, Taylor added.

Ontario charities and non-profits employ an estimated 14 per cent of the province’s workforce, Taylor noted. And those who adopt the pension will demonstrate their leadership in the decent work movement, she added.

Taylor, 49, who has worked for various non-profit organizations and charitable foundations over the past 25 years, said she wishes this pension had been available when she was starting her career.

“I personally know the value of a pension because I never had one. So I’m very interested in making sure the next generation of workers has that option,” she said.

“And we certainly aim to be one of the early adopters,” Taylor said of the network, which has 10 employees.

Teshini Harrison, 27, a policy analyst with the network, said being able to belong to a workplace pension has made her parents more supportive of her career choice.

“For them it’s about me setting myself up for the future in a career that is sound,” said Harrison, who has a master’s degree in international affairs and joined the network six months ago.

“In the long run, I think it’s going to benefit a lot of younger people coming in who want to stay in the sector and want to do this type of work,” she said. “And it’s important for a sector that believes in decent work that we walk the talk.”

Charities and non-profits can learn more about the pension on the network’s website and at the sector’s annual meeting, on Oct. 10-11, when OPTrust Select representatives will be available to answer questions and help organizations sign up.
Cathy Taylor is right, the value of a pension is huge and younger workers at Ontario's charities and non-profits are very lucky to gain access to OPTrust Select.

I've already discussed OPTrust's innovative new pension solution back in April.

Now OPTrust put out a press release, OPTrust Select recommended by Ontario Nonprofit Network (ONN):
OPTrust Select, the new defined benefit solution from OPTrust, has today been recommended by the Ontario Nonprofit Network (ONN) as the pension plan of choice for organizations in the nonprofit sector. It is the first and only ONN-recommended sector-wide pension plan for the 58,000 nonprofit organizations and over one million workers in Ontario. OPTrust Select, which launched in April of this year, was designed specifically for employers and employees in the charitable, nonprofit and broader public sectors.

The ONN has been working for years to support Ontario's nonprofit sector by taking a leadership role in championing decent work, including exploring pension plan options for the sector. The ONN and its two pensions task forces held discussions with several plans between 2015 and 2018. In September 2018 the ONN's board of directors accepted the recommendation of the ONN pensions implementation task force and recommended OPTrust Select. ONN has no involvement in the management of OPTrust Select.

OPTrust Select, which offers a defined benefit pension at a moderate cost, 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
  • An annual pension accrual rate of 0.6% of earnings;
  • Benefit 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 nonprofit groups that do not have a workplace defined benefit pension plan but may have a defined contribution plan, a group RRSP, or no retirement savings arrangement at all.

For more information about OPTrust Select, visit The ONN Pensions Task Force Report is 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.

About ONN

ONN is the independent nonprofit network for the 58,000 nonprofits in Ontario, focused on policy, advocacy and services to strengthen Ontario's nonprofit sector as a key pillar of our society and economy. ONN works to create a public policy environment that allows nonprofits to thrive. We engage our network of diverse nonprofit organization across Ontario to work together on issues affecting the sector and channel the voices of our network to government, funders, and other stakeholders.
On its blog, ONN had a comment from Michael Kainer, How we developed a pension plan tailor-made for the nonprofit sector:
Let me start with an ending: I am pleased to share that ONN’s pensions implementation task force – created in 2017 to implement the first pensions task force’s recommendations – has brought its work to a close.

Our main proposal is that ONN recommend OPTrust Select as the pension plan for the sector. And the ONN Board has accepted that recommendation. It’s a big day for me and my colleagues from both task forces. (A couple of us were on both).

It’s been just shy of three years since ONN set the process in motion: a process to examine whether a pension plan is needed, as well as to look at how the sector should deal with the then-proposed Ontario Retirement Pension Plan (ORPP). Halfway through that task force’s mandate, the province scrapped the ORPP when the federal and provincial governments agreed on improvements to the Canada Pension Plan (CPP). (As an aside, I offer the view (mine, not ONN’s) that a much more enhanced CPP would have made a nonprofit sector plan, as well as many other pension plans, unnecessary, and that would have been a good thing. Alas, those finance ministers failed to ask what I think!) The CPP enhancement will replace about one-third of a retiree’s working income, up from about a quarter right now. The generation that turns 18 in 2025 will be the first to benefit from the full enhancement, with partial increases phased in for the current working generation.

Although the ORPP didn’t go ahead, the discussion around it brought much-needed attention to the issue of the woefully inadequate retirement security of many workers in Ontario, including those in the nonprofit sector. We concluded that even the enhanced CPP wasn’t nearly enough to eliminate the need for a pension plan. It also got us thinking about what kind of retirement vehicle would be best.

In the absence of any retirement plan whatsoever beyond Old Age Security and CPP, which is the case for so many sector workers, it becomes tempting to say, “just give them something, even a registered retirement savings plan- it doesn’t much matter what since it is better than what they have now.” We resisted that approach and instead recognized that there are different routes to take, some better than others. We concluded that being able to count on a monthly retirement benefit is a very significant factor for an employee’s retirement. That typically means a defined benefit (DB) pension.

But employers have been leery of the potential liability that goes with a single employer DB plan. So our task force recommended a pension plan structure that would minimize that risk to employers while providing a predictable monthly income.

And luck was with us. The first pensions task force report came to the attention of OPTrust, a large ($20B in assets), well-established and well-regarded public sector plan. OPTrust saw an opportunity to expand to the nonprofit sector. But it also recognized that its existing plan required contributions that are unrealistically high for most nonprofits (in the range of 10% by both employee and employer). They met with us and asked what a viable plan for the sector might look like, and they came up with OPTrust Select.

OPTrust Select is a DB plan. It is not a totally new plan but an adjunct to their main plan. Thus Select gets the benefit of the economies of scale, experience and expertise of the bigger plan.

Contributions are set at 3% and 3% of wages for both employer and employees. It has thoughtfully dealt with the issue of potential contribution increases that a DB plan raises by creating a modest core benefit which should be more than adequately covered by those contributions. In addition, it has built in conditional inflation protection which is only granted if the plan can afford to give it. Thus the risk of a need for increase in contributions becomes minimal. They have done projections which suggest that the inflation enhancements are also very likely to be granted over the long term without a change in contributions.

OPTrust Select will allow employers to merge assets from an existing plan and these then get translated into a higher monthly benefit that the employees enjoy when they retire. It will permit an employee to buy back past service, for example with any RRSP assets they have, meaning a better pension benefit that reflects their time with the employer before they enrolled in Select. And there is a role for Select plan members in the governance of the plan. All these were things both task forces had pointed out should be in a sector plan.

I am pleased that we came to this result: access to an affordable, sector-wide defined benefit pension plan. If the plan is widely adopted across the sector it will mean employees can move between employers and maintain the same pension. It will provide a benefit in keeping with ONN’s effort to create better working conditions for the sector, meaning happier employees, less turnover, and a greater ability for nonprofits to serve their communities well. All of which makes the nonprofit world a better place. And who could disagree with that?

Read more about the pension plan.
Last week, I had a chance to speak to Hugh O'Reilly, President and CEO of OPTrust, but first I spoke with Dani Goraichy, Vice President Actuarial Services and Plan Policy who was kind enough to provide me with a note:
The Challenge

The defined benefit (DB) model is the most efficient model for retirement planning because it pools longevity and investment risk for its members. At scale a defined benefit plan is less expensive to operate than member-choice defined contribution plans. That said, DB pensions have been in decline for the past three decades. There are many valid reasons that have contributed to this decline. In brief, having a DB plan is generally perceived as a factor that makes a corporation less competitive in a cut-throat global economy. Canadian corporations and institutions have responded by eliminating these plans. As a result, very few DB plans that are open to new members and allow new accruals exist outside the public sector.

The OPTrust Solution

Well-respected academics have spent much time researching the problem of retirement income security. Many have presented elegant solutions that cannot be implemented because of many constraints, such as regulatory limitations. OPTrust reviewed this in-depth research and the related recommendations, turning them into a reality by modifying the DB model. We were able to preserve the best elements of their proposals while implementing a new retirement income solution that suits today’s environment.

The result is OPTrust Select.

The Design

OPTrust Select is a defined benefit pension offering that allows for some element of risk sharing between the member and the retiree, where in traditional defined benefit pension plans the employers are justifiably concerned about their significant share of the risk. OPTrust Select was designed to provide an affordable, practical retirement solution for members while also providing a comfortable level of certainty to employers about the potential volatility of contribution rates.

The contribution rates for OPTrust Select is designed to be affordable at 3% for both the employee and the employer. We do not expect those contributions to change. The core pension benefit is a 0.6% career average earnings. Benefit upgrades prior to retirement and cost-of-living increases after retirement at the rate of the average increase in the consumer price index will be granted if the plan can afford it, subject to the board’s approval.

The ability to adjust for the level of benefit enhancements before and after retirement allows the Plan to absorb market shocks without the need to change contributions. While the potential for an increase to contribution rates can never be eliminated, it is highly unlikely they will need to increase. The design of OPTrust Select creates a cushion for employers because of the substantial levers or tools that insulate against potential contribution increases.

OPTrust offers a secure retirement income with modest, predictable and stable contribution requirements. As a pension expense for employers, it is accounted for as cash contributions in most circumstances and OPTrust assumes fiduciary responsibilities as the Plan administrator. Our existing, strong governance structure, in-house professional investment expertise and world-class administration operations ensure members and employers will be well served.
I thank Dani for his wise insights and thoroughly enjoyed our long conversation.

It's important to understand that OPTrust Select isn't exactly like the OPTrust DB plan but it was designed to be an affordable solution to provide lifetime income at a very affordable cost (think Dani told me at a third of the cost).

The average salary of people who will receive a pension from OPTrust Select is around $40,000 so having a pension for them is an important benefit.

This is what Hugh O'Reilly stressed, finding an affordable pension solution for people working at charities and non-profits at an affordable cost. There is also a funding policy which was designed with input from representatives of the Ontario Nonprofit Network and incorporated the latest research from academia and industry.

In fact, both Hugh and Dani told me this is a scalable solution to address the needs of other sectors looking to provide a DB pension for their workers but OPTrust is only focusing on Ontario's non-profit sector because it has one representative who was easy to work with while keeping the focus on current members which is their priority.

Still, OPTrust is open to provide their knowledge and expertise to others who want to set up a similar plan for their workers. Hugh even told me "the more competitors we have, the better because it shows more people will be covered by defined-benefit (DB) plans which is what we want to see to address the retirement needs of many people looking to retire in dignity and security."

Lastly, Hugh was in New York City today, calling for action to address climate change:
Hugh O’Reilly, President and CEO of OPTrust, one of Canada’s largest defined benefit pension plans, delivered a call for action to investors in a keynote address during a Climate Week NYC seminar today. The seminar, Accelerating the Path to Climate Action, was organized by MSCI in partnership with the UN supported Principles for Responsible Investing (PRI).

During his address, O’Reilly detailed the steps OPTrust has taken on its journey to climate action, including the release of a Climate Change Action Plan in June. The plan contains eight areas for action, including building climate risk into OPTrust’s investment approach and pushing for increased disclosure of climate change-related information from portfolio companies. In 2017, OPTrust also became one of the first pension plans to report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

“Measurement matters,” said O’Reilly. “Accurately pricing risk in a world without commitments to proper climate-related disclosure from corporations is almost an impossible task. We are focused on developing and using measures and tools that accurately support pricing climate change-related risk. This is a quick, reliable way to set the stage for action and start gathering the critical data that we need for proper benchmarking and targets.”

OPTrust's Climate Change Action Plan, along with the 2017 Responsible Investing Report are available at The text of O’Reilly’s speech can be found here (check against delivery).
I've already discussed OPTrust's approach to addressing the risks of climate change here.

I recently discussed whether pensions are slow to move on climate change and made reference to a global ranking which showed no Canadian pension made the list.

Hugh told me he was surprised the Caisse didn't make the list since it has committed to reducing its carbon footprint by 25% by 2025 and Michael Sabia recently sounded the alarm on climate change.

He also told me OPTrust was considered "too small" for this ranking which tells me the people behind this ranking are a bit lazy and didn't really take Canadian plans seriously.

Anyway, OPTrust Select is the main focus of this comment and the latest development there is great news for people working at Ontario's charities and non-profits.

Below, Cathy Taylor, executive director of the Ontario Nonprofit Network, says while she is all for fair wages, a wage hike to $15 will undoubtedly hurt charities. Oh well, at least they can celebrate their new pension plan and attract more workers to their important sector.

Monday, September 24, 2018

CalPERS Names New CIO?

Dawn Lim and Heather Gillers of the Wall Street Journal reports, Biggest U.S. Public Pension Looks to China for New Investment Chief:
An official with China’s foreign-exchange regulator is the lead candidate to become next investment chief of the largest U.S. public pension fund, according to people familiar with the matter.

The California Public Employees’ Retirement System has offered the job to Ben Meng, deputy CIO of China’s State Administration of Foreign Exchange, one of these people said. The agency is in charge of China’s more than $3 trillion in foreign reserves. Mr. Meng previously worked for the California pension fund earlier this decade.

Mr. Meng hadn’t signed an offer letter as of Wednesday morning, this person said. Mr. Meng contacted The Journal late Wednesday to say he is a U.S. citizen working at the Chinese agency as a foreign contractor. He said he had no comment on the hiring process.

The selection of Mr. Meng would place a familiar face in charge of $360 billion in assets managed for police officers, firefighters and other public workers across the state of California. Mr. Meng spent seven years at the system, known by its abbreviation Calpers, in investment roles. He left in late 2015 and joined the Chinese government agency.

The next investment chief of Calpers faces questions on the future mix, cost and complexity of the pension fund’s portfolio.

The current chief, Ted Eliopoulos, attempted a retreat from more expensive investments as the giant retirement system reduced return expectations, cut costs and tried to better protect the pension fund from the next economic downturn. Mr. Eliopoulos said in May that he would leave his post by the end of the year.

Calpers’s next investment chief would join a fund that is debating the direction of its roughly $27 billion private-equity program. Calpers, as part of a review of that portfolio, is exploring plans to farm out billions to pools that will take stakes in private companies.

Any moves made by Calpers, which is responsible for benefits to more than 1.9 million active or retired public employees, will be watched closely in the pension world. The system is considered a bellwether for investment trends. Calpers and many other public retirement systems around the country are struggling to meet their return targets as they try to fill sizable funding gaps.

Calpers earned 8.6% in fiscal 2018 but has underperformed median returns for peers tracked by Wilshire Trust Universe Comparison Service in the five, 10 and 20 years ended June 30. Its returns have exceeded the system’s 7% target rate during the past five years but not the past 10 and 20. It has just 71% assets on hand to pay for all future benefits owed to retirees and public employees. The funded ratio for the largest 100 U.S. public pension plans was 71% as of June 30, according to Milliman.

In earlier decades, Calpers plowed into alternatives to stocks and bonds including hedge funds, private equity, timber and other commodities. Some of those bets failed to perform up to expectations after the 2008 financial crisis. Mr. Eliopoulos’s strategy was to pull out of hedge funds and try to make the portfolio less complex.

That meant undoing the work of several predecessors and limiting the number of outside managers handling Calpers’s assets. The retirement system severed ties with many private-equity, real-estate and other outside firms handling its money and explored other ways to invest in private equity without traditional pooled funds.

Board directors also agreed to a recommendation championed by Mr. Eliopoulos that the fund’s long-term investment target drop to 7% from 7.5% because of changing market conditions and a cash crunch.

Now Calpers Chief Executive Marcie Frost wants the system’s next CIO to have deep investment experience, said a person familiar with the matter. Mr. Eliopoulos hadn’t managed money on Wall Street before becoming the permanent investment chief in September 2014.

Mr. Meng had jobs at banks and investment firms before he worked for Calpers and the Chinese government. He was a bond trader at Morgan Stanley as well as a senior portfolio manager at Barclays Global Investors, a business now owned by money-management giant BlackRock Inc., according to biographies at universities where he has taught classes.

Mr. Meng joined Calpers in late 2008 as a portfolio manager for its fixed-income quantitative research group and later was promoted to help oversee the pension fund’s investment mix. One of his contributions was developing ways for Calpers to organize its investments around risks.

If he takes the job he would be the third chief investment officer named since 2009.
Randy Diamond of Chief Investment Officer also reports, CalPERS Selects New Chief Investment Officer:
Ben Meng, a former CalPERS portfolio manager who now works for the Chinese government foreign exchange office, has been offered the job as the California pension system’s chief investment officer and is in negotiations over his compensation, sources say.

“No candidate has accepted an offer,” Megan White, a spokeswoman for the largest US pension, told CIO in an email. She declined to comment further.

If Meng successfully completes negotiations with CalPERS management, he would replace Ted Eliopoulos, who announced in the spring that he would leave CalPERS by the end of the year.

Back in June, the CalPERS board approved a change that would allow the pension system to increase the top yearly compensation of the CIO, including bonuses, to as much as $1.77 million, up from the maximum $1.1 million Eliopoulos could have earned.

Meng was well-liked by CalPERS investment staffers during his tenure from 2008 to 2015, sources say. Meng started as a portfolio manager in the $357 billion plus pension system’s fixed income asset class in 2008. He was promoted to head of asset allocation for the fund in 2012.

Meng joined the Chinese government in 2015 as deputy CIO of China’s State Administration of Foreign Exchange, which handles foreign currency reserves of more than $3 trillion.

CalPERS is planning to hire a new CIO at a crucial time. The pension plan is expected to launch a $20 billion private equity direct investment organization, the first of its kind by a US pension plan, within the next few months.

At the same time, pension plan officials acknowledge that it may be difficult to even meet the plan’s 7% rate of return, which has been lowered from 7.5%, over the next decade.

CalPERS officials and its consultants estimate an annualized rate of return for the next decade of around 6.2%, though they say they believe CalPERS can earn the 7% rate of return annualized over the next 30 years.

In choosing Meng, CalPERS officials decided to hire someone with extensive investment experience, including tenure on Wall Street. Meng worked at several Wall Street firms before joining CalPERS in 2008.

Eliopoulos and his predecessor, Joseph Dear, were more known for their management experience than their investment expertise.
And John Gittelsohn of Bloomberg reports, Calpers Said to Discuss CIO Job With Ex-Portfolio Manager Meng:
The California Public Employees’ Retirement System has been in talks with Ben Meng, a former Calpers portfolio manager who is now an official with China’s State Administration of Foreign Exchange, to be its next chief investment officer, according to a person with knowledge of the matter.

“No candidate has accepted an offer,” Megan White, a spokeswoman for the largest U.S. pension, said in an email. The Wall Street Journal reported earlier Wednesday that Meng was the leading candidate.

Meng, who couldn’t immediately be reached for comment, worked for Calpers until 2015 in several investment roles when he left to join the Chinese government agency in charge of its foreign reserves. He is still negotiating the terms of his pay and bonus, which is based on the $360 billion fund’s performance, according to the person, who asked not to be identified because the contract talks are confidential.

“He’s a really smart guy,” JJ Jelincic, a former board member who worked with Meng in the Calpers investment office, said in a phone interview. “He’d be an excellent choice.”

The board voted in June to pay the next investment chief as much as $1.77 million, more than double the compensation of outgoing CIO Ted Eliopoulos, who plans to leave at the end of this year.
On Monday, CalPERS made it official, Ben Meng will be the next CIO.

Meng will have huge responsibility managing the assets of the largest US public pension fund.

CalPERS is a beast and it's always under scrutiny. Case in point, its CEO is under fire for supposedly lying about her educational credentials. It's a bunch of nonsense but some people love making a mountain out of a molehill.

Mr. Meng knows CalPERS and the politics all too well, he used to work there before as a fixed income portfolio manager. He has great investment experience and is now the deputy CIO of China’s State Administration of Foreign Exchange, the state agency in charge of more than $3 trillion in foreign reserves.

All that investment experience was a prerequisite for this job as he will be in charge of more than $360 billion in assets across public and private markets.

What is also interesting is CalPERS' new private equity model could push it in the global ranks:
The California Public Employees’ Retirement System (CalPERS), the largest private investor in the US, would likely move up in the global ranks under its plan to start a private equity direct investment organization, statistics and interviews show.

CalPERS’s $27.1 billion private equity program tops the US numbers currently among institutional investors and is seventh globally as of this month, show statistics from alternative investment data provider Preqin.

CalPERS plans to invest up to $6.5 billion annually, starting as soon as late 2018 or early 2019, if its board gives final approval to the direct investment program as expected. Another up to $6.5 billion would be allocated to its traditional private equity program, to grow or at least maintain the $27 billion allocated to its traditional private equity investments, CalPERS officials tell CIO. The combination would raise CalPERS’s profile in the global rankings.

The data shows that if other plans remain relatively stagnant in their private equity allocations as they have in the past few years, CalPERS could rise to fourth globally within a year’s time, just below the third-place sovereign wealth fund in the United Arab Emirates, which has $41.2 billion invested in private equity investments.

The two largest global private equity investors are the Canadian Pension Board with $61.4 billion, followed by the sovereign wealth fund in Kuwait with $52.4 billion, the Preqin data shows.

CalPERS could surpass the now fourth-ranked Central Provident Fund in Singapore with $39.4 billion and would very likely pass the fifth-ranked Ontario Teachers’ Pension Plan with $28.5 billion, and the sixth-ranked APB, the Dutch pension plan, with $27.8 billion.

CalPERS would also jump way ahead of the California State Teachers’ Retirement System (CalSTRS), which has the second-largest private equity portfolio in the US, with $20.8 billion in holdings, Preqin numbers show.

However, it’s difficult to make an exact estimate of how big the CalPERS program will get, because distributions also must be figured in. Even if its private equity allocations stay the same, each year at CalPERS and other pension funds, some of their traditional limited partner/general partner relationships wrap up after distributing profits.

But what is clear is that CalPERS, which is largest US institutional investor with around $360 billion in assets under management, will be building a much larger private equity program if its direct investment program becomes a reality.

It would also be able to use its well-known name in institutional investment circles to aim for success for its direct investment organization, said David Wessel, adjunct professor of finance and a director of executive education at the University of Pennsylvania’s Wharton School.

“CalPERS has a strong reputation that could help it attract investments,” said Wessel. The professor says that the key question is whether CalPERS will be able to get the right investment talent who can find the top deals necessary.

One part of CalPERS’s direct investment organization—called Innovation—plans to focus on late-stage venture capital details in technology, life science, and healthcare companies.

The second program—called Horizon—aims to make buy-and-hold investments in more traditional companies, eschewing the normal seven- to 10-year private equity cycle in the traditional funds CalPERS invests in as a limited partner.

CalPERS officials say they envision both Innovation and Horizon would grow to investment funds of $10 billion each over the next decade.

CalPERS’s traditional private equity program wouldn’t be neglected, even with the new direct investment organizations.

John Cole, a CalPERS investment director, told CIO that CalPERS needs to retain and grow its $27 billion traditional private equity portfolio, which is largely in co-mingled funds with general partners, in order for the pension plan to meet its desired goal, a 10% weighting of the total portfolio towards private equity.

Private equity currently makes up around 8% of CalPERS’s approximate $360 billion portfolio.

Private equity has also been its best-producing asset class over the last two decades.

Building the traditional CalPERS private equity program to a larger size will also mean that CalPERS will have to be able to make additional commitments in a competitive marketplace.

CalPERS statistics show that the pension plan only committed slightly over $3 billion in new private equity commitments in its traditional program in the fiscal year ending June 30, 2017, a number that has stayed relatively stagnant since the financial crisis.

However, that number is going up. Megan White, a CalPERS spokeswoman, said in an email that the commitment number increased to $5 billion in the fiscal year ending June 30, 2018. She said CalPERS expects it can commit $6 billion in the current fiscal year.

Commitments, however, don’t mean investments. CalPERS statistics show that the traditional private equity program still has more than $14 billion in dry powder, money committed by the pension plan but not invested by its general partners.

CalPERS is still conducting a review of its traditional private program. Six firms—BlackRock, Goldman Sachs Asset Management, Hamilton Lane, Neuberger Berman, AlpInvest Partners, and HarbourVest Partners—have submitted proposals to run all or part of CalPERS’s traditional private equity program.

Cole said CalPERS is still reviewing whether to outsource all or part of the traditional private equity program. A final decision is expected by the end of the year.

Sources familiar with all CalPERS operations say while part of the program could be farmed out, CalPERS officials are leaning towards retaining control over much of its traditional private equity program.

On the direct investment front, the CalPERS full board is also expected to see the final proposal for the direct investment program by the end of this year or early next year and then vote on whether to approve the program or not. A majority of board members have expressed support for the direct investment program and have already given a preliminary go-ahead for CalPERS to plan the two direct investment organizations.

While CalPERS would fund the two organizations, they would be run independently and would not be under direct control of the pension plan.
I've already covered how CalPERS is gearing up its direct program. CalPERS needs to outsource part of its PE program, the co-investment part so that it can scale fast into direct investments and lower overall fees.

Below, Part 1 of the August Investment Committee meeting. Listen to outgoing CIO Ted Eliopoulos go over total fund performance.

On Monday, they are holding their September board meeting. The agenda is available here.

Friday, September 21, 2018

The Lehman's Limp?

Michael Hudson wrote a omment earlier this week, The Lehman 10th Anniversary spin as a Teachable Moment:
Wall Street did not let the Lehman Brothers crisis go to waste. The banks that have paid the largest fines for financial fraud are now much bigger and more profitable. The victims of their junk mortgage loans are poorer, and the economy is facing debt deflation.

Was it worth it? What was not saved was the economy.

Today’s financial malaise for pension funds, state and local budgets and underemployment is largely a result of the 2008 bailout, not the crash. What was saved was not only the banks – or more to the point, as Sheila Bair pointed out, their bondholders – but the financial overhead that continues to burden today’s economy.

Also saved was the idea that the economy needs to keep the financial sector solvent by an exponential growth of new debt – and, when that does not suffice, by government purchase of stocks and bonds to support the balance sheets of the wealthiest layer of society. The internal contradiction in this policy is that debt deflation has become so overbearing and dysfunctional that it prevents the economy from growing and carrying its debt burden.

Trying to save the financial overgrowth of debt service by borrowing one’s way out of debt, or by monetary Quantitative Easing re-inflating real estate, stock and bond prices, enables the creditor One Percent to gain, not the indebted 99 Percent in the economy at large. Therefore, from the economy’s vantage point, instead of asking how the banks are to be saved “next time,” the question should be, how should we best let them go under – along with their stockholders, bondholders and uninsured depositors whose hubris imagined that their loans (other peoples’ debts) could go on rising without impoverishing society and preventing creditors from collecting in any event – except from government by gaining control over it.

A basic principle should be the starting point of any macro analysis: The volume of interest-bearing debt tends to outstrip the economy’s ability to pay. This tendency is inherent in the “magic of compound interest.” The exponential growth of debt expands by its own purely mathematical momentum, independently of the economy’s ability to pay – and faster than the non-financial economy grows.

The higher the debt/income ratio rises, the more interest, amortization payments and late fees are extracted from the economy. The resulting debt burden slows the economy, causing defaults. That is what happened in 2008, and is accelerating today as debt ratios are rising for corporate debt, state and local debt, and student debt.

Neither legislators, academics nor the public at large recognize a corollary Second Principle following from the first: An over-indebted economy cannot be saved unless the banks fail. That means writing down the financial claims by the One to Ten Percent – in other words, the net debts owed by the 99 to 90 Percent. Wiping out bad debts involves writing down the “bad savings” that are the counterpart to these debts on the asset side of the balance sheet. Otherwise the economy will suffer debt deflation and austerity.

“Recovery” since 2008 has been much slower than earlier recoveries because debt deflation is siphoning off more and more personal and corporate income. To make matters worse, the bailout’s policy of Quantitative Easing to re-inflate asset prices has reduced rates of return for pension funds, insurance companies and employee retirement savings. This means that more state and local government income must be diverted to meet retirement commitments.

Something has to give, and it is not likely to be the savings of the donor class at the top of the economic pyramid. As a result, the economy at large is threatened with an exponentially expanding erosion of disposable income and net worth for most people and companies. Investment managers are warning of a financial meltdown, given today’s historically high price/earnings ratios for stocks and also for rental properties.

What is not acknowledged is that such a crisis is a precondition for today’s economy to recover from the rising debt/income and debt/GDP ratios that are burdening the United States, Europe and other regions. At least the United States has been able to monetize its budget deficits and subsidize banks to carry its rising debt overhead with yet new debt. The Eurozone has banned budget deficits of over 3 percent of GDP, imposing austerity that leaves the only response to over-indebtedness to be Greek-style austerity: depopulation, shrinking living standards, wipeouts of retirement income and pensions, mortgage defaults, shortening lifespans, and mass selloffs of public infrastructure to foreign financial appropriators.

None of this was spelled out in the September 15 weekend marking the tenth anniversary of Lehman Brothers’ failure and subsequent rescue of Wall Street. President Obama, Treasury Secretary Tim Geithner and their fellow financial lobbyists at the Federal Reserve and Justice Department are credited with saving “the economy,” as if their donor class on Wall Street was a good proxy for the economy at large. “Saving the economy from a meltdown” has become the euphemism for saving bondholders and other members of the One Percent from taking losses on their bad loans. The “rescue” is Orwellian doublespeak for expropriating over nine million indebted Americans from their homes, while leaving surviving homeowners saddled with enormous bubble-mortgage payments to the FIRE sector’s owners.

What has been put in place is not a restoration of traditional status quo, but a reversal of over a century of central bank policy. Failed banks have not been taken into the public domain. They have been enriched far beyond their former levels. The perpetrators of the collapse have been rewarded, not penalized for lending more than could possibly be paid by NINJA borrowers and speculators whose mortgage applications were doctored by systemic fraud at Countrywide, Washington Mutual, Bank of America, Citigroup and their cohorts.

The $4.3 trillion that could have been used to save debtors was given to the banks and Wall Street firms whose recklessness and outright fraud caused the crisis. The Federal Reserve “cash for trash” swaps with insolvent banks did not restore normalcy or the status quo ante. What occurred was a financial revolution by stealth, reversing the traditional responsibility of creditors to make prudent loans.

Quantitative Easing saved creditors and the largest stockholders and bondholders by lowering the interest rates by enough to make it profitable for new loans to inflate asset prices on credit. This revived the value of collateral backing bank loans and bondholdings. “Saving” the economy in this way actually sacrificed it. That is why our “recovery” is only “on paper,” a result of calculating GDP to include bank earnings and hypothetical homeowner windfalls as rents are soaring.

Among Democrats, the most extreme tunnel vision denying that debt is a problem comes from Paul Krugman: Writing that “The purely financial aspect of the crisis was basically over by the summer of 2009,” he criticized what he called the “bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, was the real problem.”[1]

This misses the point that 2009 was the real beginning for most of the nine million homeowners being foreclosed on and evicted from their homes. Consumers found themselves with less income “freely disposable” after paying their monthly FIRE sector nut off the top of their paycheck – housing charges, credit card charges, medical insurance, student debt, FICA withholding and tax withholding. Krugman says that he would have solved the problem by more deficit spending to pump enough money into the economy to enable debtors to keep paying the banks their exponential growth of interest claims.

We are still living in the destabilized, debt-ridden aftermath of such pro-bank advocacy. In the New Yorker, John Cassidy celebrates a book by Columbia professor Adam Tooze promoting the idea that “the economy” cannot exist without the credit (that is, debt) provided by the financial sector. True enough, but does it follow that rescuing the economy must involve rescuing Wall Street and enriching the banks at the expense of the rest of the economy?[2] That conflation is an Orwellian rhetoric of deception that has been introduced to the discussion of how the economy was “rescued” by locking in today’s Great Debt Deflation.

At the neoliberal/neocon Brookings Institution, Treasury secretaries Hank Paulson and Tim Geithner joined with the Federal Reserve’s Ben Bernanke to explain that the public simply didn’t understand how successful they all were in saving not only the banks, but non-bank financial institutions. Unlike Sheila Bair, they did not point out that behind these institutions were the bondholders, the One Percent of savers who held the rest of the economy in debt. Bernanke wrote a Financial Times piece producing junk statistics purporting to show that there was no underlying debt or financial problem at all, merely a “panic.”[3] To paraphrase, he said: “The crisis was all in the mind folks. Nothing to see here. Keep moving on.” It is as if, as Margaret Thatcher liked to insist, There Is No Alternative.

Can this bailout without debt writedowns really bring prosperity? Can economies achieve growth by “borrowing their way out of debt,” by creating enough new credit to cover the interest charges out of capital gains from the asset-price inflation fueled by new bank credit. That is the logic that has guided the Federal Reserve’s net $4.3 trillion in Quantitative Easing, and the parallel credit creation by the European Central Bank under Mario “Whatever it takes” Draghi. Ellen Brown recently published a review, “Central Banks Have Gone Rogue, Putting Us All at Risk”, noting that the ECB has become a major stock buyer.[4] The beneficiaries are the stockholders who are concentrated in the wealthiest percentiles of the population. Governments are not underwriting homeownership or the solvency of labor’s pension plans, but are underwriting the value of collateral backing the savings of the narrow financial class.

The GDP accounts report the widening gap between low government bond rates and the cost of credit to banks compared to the higher rates paid by mortgage borrowers, credit-card holders and student loan customers as “financial services.” What is extracted from the economy is added to the GDP statistic instead of being treated as a subtrahend. This absurd practice reflects the degree to which Wall Street lobbyists have captured economic statistics. The National Income and Product Accounts (NIPA) have been turned into a vehicle for deception. What is celebrated as growth of the GDP since 2008 has been mainly the growth in financial extraction, along with the health-insurance sector profiting from Obamacare.

Glenn Hubbard, chairman of the Council of Economic Advisors under George W. Bush, uses Orwellian doublethink to pretend that “Debt is Wealth.” He concludes a Wall Street Journal op-ed: “An ability to recapitalize banks remains crucial and must be explained to a skeptical Congress and public,”[5] so that wealthy bondholders and speculators will not suffer losses.

On a brighter side, Adair Turner pokes fun at the “Authoritative experts such as the IMF [who] explained how increased securitisation and trading activity made the financial system more efficient and less risky.”[6] It was as if “options” and hedges can get rid of risk entirely, not shift them onto Wall Street victims such as the naïve German Landesbanks.

The aim of this week’s disinformation campaign is to prevent popular anger advocating what was done in classical antiquity. The ancients fought civil wars for land redistribution and debt cancellation. Today the demand should be for mortgage writedowns to bring their carrying charges in line with reasonable rent charges, limited to the former normal 25 percent of homeowner income – while rolling back the FICA wage withholding and allied taxes levied to bail out the creditor class.

An Athenian antecedent to today’s financial takeover

It is an old story, with a striking parallel in classical Athens. After losing the Peloponnesian war to oligarchic Sparta in 404, a Pinochet-style military junta – the Thirty Tyrants – were installed. During its eight months of terror, its’ members killed a reported 1,500 democratic advocates whose land and other property they grabbed. Advocates of democracy took refuge in Thrace and other neighboring regions.

After the exiled democratic leaders reconquered Athens, they sought to restore harmony, going so far as to pay off all the debts that the oligarchic junta had run up to Sparta. To top matters, the subsequent 4th century obliged Athenian jurors and indeed, mayors in some Greek cities to swear an oath: “I will not allow private debts (chreon idiom) to be cancelled, nor lands nor houses of Athenian citizens to be redistributed.”[7]

If no such pledge is needed today by public officials, it is because the financial administrators at the Treasury, Federal Reserve and other regulatory agencies already have shown themselves to be so tunnel-visioned from graduate school through their employment history that they can be trusted to find debt writedowns as unthinkable as enforcing laws against criminal financial fraud to punish individuals rather than their institutions. Academia joins in the deception that financial engineering can sustain a geometric growth in debt ad infinitum without imposing austerity. The bailout aftermath has demonstrated that corporations are not really “persons” if they cannot be given jail time.

The key financial principle is that this self-expansion of interest-bearing debt grows to absorb more and more of the economic surplus. The solution therefore must involve wiping out the excess debt – and savings that have been badly lent. That is what crashes are supposed to do. It was not done in 2008. That is why the status quo was not restored. A vast giveaway to the financial elites occurred, setting the rest of the economy on a road to debt peonage.

It would have been nice to have read an article by Sheila Bair explaining the procedures that the FDIC had in place, ready to take over insolvent Citigroup and other banks in similar straits, saving all the insured depositors by taking over these institutions. No doubt as public institutions they would not have indulged in junk mortgages or, for that matter, takeover loans.

It would have been nice to hear from Hank Paulson and perhaps Barney Frank on how they tried to get incoming President Obama to write down bad mortgages whose carrying charges were as far above the debtor’s ability to pay as they were above the going rental value for similar properties. It would have been nice to hear a mea culpa from Mr. Obama apologizing for representing the interest of his campaign donors by standing between them and his voters with pitchforks. Even an article by Tim Geithner or Eric Holder on how lucky they felt at getting such high-paying jobs after they left office from the financial sector they had overseen and “regulated.”

What is needed now is to follow up the primary policy perception that today’s financially dysfunctional economy cannot be saved without a bank crash. That means rolling back the enormous gains that the FIRE sector has made since 1980 at the expense of the “real” economy. Banks have ceased to be an “engine of growth.” They are not making loans to create new means of production. They are lending to asset strippers, not asset creators. It is not hard to show this statistically. (I drafted an attempt in Killing the Host, and am now working with Democracy Collaborative to prepare a larger study.)

At stake is whether the U.S. and Western European economies are going to end up looking like those of Greece, Latvia and Argentina – or imperial Rome for that matter. Neoliberals applaud today’s victorious finance capitalism as the “end of history.” One such end has already occurred, at the close of Roman antiquity. It is remembered as the Dark Age. Progress stopped as the creditor and landowning class lorded it over the rest of society. Trade survived only among the lords at the top of the economic pyramid. Today’s “End of History” dream threatens to unfold along similar lines. It is all about relative power of the One Percent.


[1] Paul Krugman, “Days of Fear, Years of Obstruction,” The New York Times, September 14, 2018.

[2] John Cassidy, A World of Woes: A global take on a decade of financial crisis,” The New Yorker, September 17, 2018.

[3] “Ben Bernanke pins blame for Great Recession on bank panic,” Financial Times, September 13, 2018.

[4] Ellen Brown recently published a review, Central Banks Have Gone Rogue, Putting Us All at Risk.” Public Banking Institute and Truthdig, September 13, 2018.

[5] Glenn Hubbard, “Bailouts Shouldn’t Be Only for Banks” Wall Street Journal, September 14, 2018. To be sure, Hubbard acknowledges that Republicans had agreed to but incoming President Obama nixed: “The government should have directed a mass refinancing of mortgages for primary homes in which the borrower was current in payments.”

[6] Adair Turner, “Banks are safer but debt remains a danger,” Financial Times, September 12, 2018.

[7] Demosthenes Against Timocrates (xxiv.149).
Whether or not you agree with Michael Hudson, take the time to really understand his arguments, he's an intellectual tour de force and even though I don't agree with everything he wrote above, he always makes me think about the state of the economy and why we're still stuck in an economic malaise.

Michael basically believes the system is rigged to continuously bail out bankers and creditors and he thinks we need a major reset and to let some banks collapse and debt forgiveness for many "debt prisoners" in the real economy.

I have mixed views on this. It's true that big banks have deviated from their traditional bread and butter business of lending to trading risk assets around the world. That's where most of the profits come from and it's all about return on equity taking minimum risk for banks.

But it's debatable whether QE has been a big boon for banks, it allowed them to clear their books filled with toxic products but it also exacerbated the debt deflation Michael is talking about and we are now at a point where the yield curve might invert which isn't good for banks.

Also, it's important to understand that pensions and large private equity funds (funded by pensions) have stepped in to fill the vacuum banks left behind, lending to mid-sized companies and providing mortgage debt for commercial real estate.

Where I agree with Michael is US public pensions have been hurting, unable to deliver their required returns but it's not only QE which is the culprit. There are a lot of reasons as to why, poor governance, unrealistic return expectations, farming out billions to hedge funds and private equity funds instead of managing more internally saving on fees.

You have to also ask yourself why are Canada's large public pensions in such good shape relative to their US counterparts? And by good shape, I mean they're fully funded or close to it.

There are a lot of reasons why but the two most important ones are good governance and a shared risk model which typically shares the risk across active and retired members.

As far as central banks, Market Philosopher had a great comment on central banks and sour grapes which you all need to read before criticizing them.

One thing which does concern me and Michael alluded to it is the unsustainable trend of pervasive and rising inequality.

Simply put, it's unsustainable and the political backlash will come in the form of more redistributive policies. This is especially true since the US is on the verge of a retirement crisis.

Below, Michael Hudson on The Lehman's Limp. Take the time to listen to Michael even if you don't agree with his leftist views, he raises many excellent points worth considering.