Friday, November 16, 2018

Top Funds' Activity in Q3 2018

Arie Shapiro reports, Which Hedge Funds Got ‘Whale Rocked’ in October?:
Today is the deadline for 13Fs, where funds of all kinds will disclose what stocks they bought and which ones they sold in the third quarter.

But this filing period is a bit different than others because the quarter ended just days before a rout in the market began: The Nasdaq plunged 9.2% in October, its largest monthly decline since November 2008, while the S&P 500 fell almost 7%.

And volatility hasn’t subsided since -- Just look at what happened in the e-minis overnight (rallying 16 points last night only to reverse by ~33 handles, and now practically flat) or what’s been going in crude oil over the past month and a half, with WTI seeing virtually zero upticks in a straight slide from $77 to $55 per barrel.

So what we may get is a proper look at who piled into some of the biggest pressure points of the market during the meltdown, for example the breakdown in the tech sector. What we won’t get is a more up-to-date view on who panic sold and/or who doubled and tripled down as the selloff deepened. That’ll have to wait until the next 13F season -- unless the investor letters leak before then, of course.

We’ve received some insight into the October carnage from several TMT-heavy hedge funds, like Whale Rock, the $3 billion firm run by former Fidelity portfolio manager Alex Sacerdote, which saw its flagship fund plummet 11% during the month; meanwhile, the master fund at Light Street Capital, Glen Kacher’s $1.4 billion firm, fell more than 9%.

See the graphic below for a look at Whale Rock’s top holdings by market value as of June 30, which can be viewed via the FLNG function; the positions will be updated later today when the new 13F gets filed.

As you can see, three of the FAANGs topped the list (Amazon was 8.6% of the fund’s portfolio followed by Netflix 7.5% and Facebook 6.5%) while the rest of the top ten was littered with tech momentum names like Shopify, MongoDB, Nvidia, and Square, all of which are down many percentage points since the end of the third quarter.

I’ll be screening for which other funds potentially got "Whale Rocked," which is a completely made-up term by me in a bid to understand who else may have gotten wrecked when tech turned south. Of course, this non-trademarked term only works well in the context of one month’s performance, as Whale Rock was still up for the year through October (up 4.7% vs S&P 500 up 1.4%), according to an investor document viewed by Bloomberg.

The keys will be to check who took a fat new stake or boosted their positions in some of the momentum names in the tech sector, many of which tend to be hedge fund hotels. On the flip side, I’ll also be curious to see who exited their positions in the worst-performing sectors (tech & communication services, consumer discretionary, energy and industrials) and rotated into more defensive ones like the utilities, consumer staples, or REITs, all of which outperformed since the end of the third quarter, as the graphic below shows.

13F Cheat Sheet

Here’s a list of names to watch with their respective share move quarter-to-date:
  • Recent downward spirals: General Electric -24% (13F yesterday showed Bridgewater’s top new buy in the third quarter was GE with ~2 million shares), Goldman Sachs -8.6%
  • The FAANGs: Netflix -21%, Amazon -19%, Apple -15%, Facebook -14%, Alphabet -13%
  • Other megacap tech names: IBM -21%, Baidu -20%, Salesforce -17%, Texas Instruments -12%, Alibaba -11%
  • Momentum: Roku -42%, GrubHub -38%, AMD -37%, World Wrestling -31%, Nvidia -29%, Match -28%, Spotify -27%, Square -27%, Snap -21%, Micron -16%, Shopify -16%
  • Video games: Activision -37%, Electronic Arts -27%, Take-Two -22%
  • Housing-related: Zillow -31%, Mohawk -30%, D.R. Horton -18, Lowe’s -17%, Masco -15%, Home Depot -14%, Lennar -12%
  • Energy: Baker Hughes -30%, Marathon Oil -29%, Valero Energy -27%, Apache -26%, USO -25%, XLE -13%
  • California utilities after the wildfires: PG&E -29% (13F out last night showed Baupost boosted their stake in the third quarter by 322%, or 14.5 million shares) and Edison International -18%
  • Pot stocks: Aurora Cannabis -30%, Cronos -25%, Tilray -22%, Canopy Growth -21%
  • And what went up? Tesla +28%, Red Hat +27% (bailed out by the IBM deal!), TripAdvisor +24%, Starbucks +19%, Twitter +14%. Walgreens +12%, Procter & Gamble +12%, McDonald’s +10%, CME Group +10%

It's that time of the year again when people get a sneak peek into what top funds bought and sold during the last quarter with a 45-day lag.

Before you get all excited, I warn you, many top funds got dinged in Q3 and many are still getting clobbered in Q4.

These are brutal, BRUTAL markets as the rise in rates is starting to take a bite out of stocks and volatility is on the rise. If you didn't read the macro environment right, you got killed picking stocks over the last six months.

For example, while the great money manager Stanley Druckenmiller (see interview at end of comment) was surprised big pharmaceutical shares took off in Q2 and have done well, I wasn't because it's all part of my macro thesis which I laid out at the beginning of year, namely, return to stability. And since the summer, I told my readers to get defensive and stay defensive.

What else did I notice? The ferocity of the moves lately is unbelievable which makes it very tough for large funds to trade in this environment. Large cap stocks are swinging like small cap stocks, it's crazy out there and I know, I'm on markets every single day looking at these wild gyrations.

Let's begin analyzing what top funds bought and sold in Q3 with some more articles. Svea Herbst-Bayliss and David Randall of Reuters report, Prominent managers loaded up on Apple before recent tumble:
Several prominent investors put fresh money to work in Apple (AAPL) during the third quarter even as they sold out of other high-flying tech companies, betting the iPhone maker’s stock would keep rising as strong growth overshadowed rising trade tensions between the United States and China.

The purchases, which were revealed in securities filings on Wednesday, may be leaving large investors with steep losses if Apple continues its more than 15 percent decline for the month so far.

Mutual fund giant Fidelity added 7 million shares, bringing its total holdings to 110.9 million shares, regulatory filings and data from research firm show. Janus Henderson Group added 3.3 million shares for a total of 20.8 million shares and J.P. Morgan Chase & Co boosted its holding to 42.7 million shares after adding 1.3 million.

Philippe Laffont’s Coatue Management made a big bet by raising his exposure by 938 percent to 884,321 shares while Chase Coleman’s Tiger Global Management put on a new position to own just over 1 million shares.

Despite the steep declines in Apple, some hedge fund managers said that they are continuing to add to shares in the company.

“We know it is not a Facebook or a Google with eye-popping growth but we’re not paying for that,” said Shawn Kravetz, founder of Esplanade Capital, at the Reuters Global Investment 2019 Outlook Summit in New York on Wednesday.

Kravetz, who added to his Apple position Wednesday morning, said investors like himself are attracted to the company’s compelling valuation compared to other Silicon Valley giants.

The declines in Apple may add to what is proving to be another difficult year for the hedge fund industry.

Overall, the average hedge fund dropped nearly 3 percent in October, the worst monthly loss since 2011, in large part due to over-exposures to the technology industry, according to Hedge Fund Research.

Given the increased volatility in the U.S. stock market, defensive-minded funds will likely post the strongest returns through the end of the calendar year, said Kenneth Heinz, president of HFR.

“Anticipating the market volatility which began in September and accelerated in October will continue into 2019, strategies positioned for this transitional market environment are likely to lead performance through year end,” he said.

Quarterly disclosures of hedge fund managers’ stock holdings in 13F filings with the U.S. Securities and Exchange Commission are one of the few public ways of tracking what the managers are selling and buying. But relying on the filings to develop an investment strategy comes with some risk because the disclosures are made 45 days after the end of each quarter and may not reflect current positions.

The moves into the shares of Apple came at a time when several prominent hedge funds were starting to shed their holdings of the FANG stocks - Facebook Inc (FB), Inc (AMZN), Netflix Inc (NFLX), and Google’s parent Alphabet Inc (GOOGL) - that had led the market higher over the last two years.

Jana Partners, for instance, sold all of its approximately 651,000 shares of Facebook and all of its approximately 44,000 shares of Alphabet Inc in the third quarter, according to securities filings. Third Point LLC sold all of its approximately 3 million shares of Facebook, a position which had made up about 4 percent of its prior portfolio.

Los Angeles-based asset manager TCW Group Inc sold all of its approximately 127,000 shares of Netflix during the same time period.
So you read this and you notice a few things. Big hedge funds play big tech stocks because they need the liquidity to manage their risk and get in and out efficiently with few transaction costs.

The focus is always on FANG stocks. Reading this article, I can tell you Jana Partners and Third Point did a wise move shedding Facebook (FB) last quarter (click on image):

As far as Coatue Management and Tiger Global, they added to Apple (AAPL) and the stock did fine in Q3 before getting clobbered during the nasty October selloff, the worst October since 2008 (click on image):

Now, a lot of people ask me what do I think of Apple shares now? You need to start following me on StockTwits where I post some of my ideas on stocks and sectors.

On Apple, I said as long as it holds above its 50-week moving average, I'd be long despite the October selloff and negative weekly MACD (click on image):

I don't care if it's Warren Buffett's top position, I don't care if the company will stop reporting unit sales (everyone knows they've been falling and will continue to fall), all I care about is that weekly chart above and it helps knowing they have more cash than they know what to do with, so expect buybacks to continue lending support to shares (not that I really put too much credence to the buyback bull).

Still, I expect a slowing global economy next year with high possibility of a recession, so it's hard for me to be all excited about Apple from a fundamental point but if you notice, the company is moving aggressively into entertainment and other financial ventures which is positive.

All this to say, if I had a choice between owning Apple or Facebook here, I'd follow the Oracle of Omaha into Apple, no doubt about it (I never liked Facebook, I personally think it's a waste of time and it's definitely not a well-run company).

But the point of these quarterly comments on top funds' activitry is to show my readers there's so much more to this market than FANG stocks or high-flying tech stocks like NVDIA (NVDA) which got killed on Friday (click on image):

On  StockTwits, told my followers, don't bother trying to play this chip stock on the long side, it broke below its 100-week and the weekly MACD is negative, telling me even if there's a bounce, it's headed much lower.

In general, I don't like semiconductor shares (SMH) here given my macro views that the US and global economy are slowing (click on image):

But it's a bit of crazy market and while some risk assets are getting clobbered, others might come back.

Earlier this week, I told my followers on StockTwits to pay attention to biotech shares (XBI) which got clobbered as rates rose and were at an important support level (click on image):

It’s still very weak and I'd be very careful here but you see how it bounced off its 200-week moving average? In the past, biotech shares came roaring back after such a selloff but the rise in rates is removing a lot of liquidity in markets.

Still, on Friday, biotech shares (XBI) rallied 2.5%  that's all it took to ignite many of the smaller biotech shares I track.

You'll notice shares of Tesaro (TSRO) rallied 32% on rumors of a buyout but the stock has punished investors over the last two years (click on image):

I noticed Joseph Edelman's Perceptive Advisors, one of the best biotech funds, took a small position in this one as it got killed in Q3 but I don't know what to make of today's big pop.

Perceptive Advisors also added big to shares of Arena Pharmaceuticals (ARNA) in Q3 and the company's stock had a spectacular week.

Perceptive also made big money buying the dip in Solid Biosciences (SLDB) this year and added to its position in La Jolla Pharmaceuticals (LJPC) as shares declined in Q3.

Anyway, I can literally ramble on for days about what top funds bought and sold but I will spare you the details. Zero Hedge did a good job going over 13-F summary here.

As always, take this stuff with a grain of salt and remember, even the "gurus" get it wrong, just ask Seth Klarman and others who got scorched this week on their PG&E (PCG) positions. Shares of that utility rallied 37% Friday but the damage is done (click on image):

I'll end it there. Have fun looking at the third quarter activity of top funds listed below. The links take you straight to their top holdings and then click on the fourth column head, % chg, to see where they decreased (click once on % chg column head) and increased their holdings (click twice on % chg column head).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Appaloosa LP

2) Citadel Advisors

3) Balyasny Asset Management

4) Farallon Capital Management

5) Peak6 Investments

6) Kingdon Capital Management

7) Millennium Management

8) Eton Park Capital Management

9) HBK Investments

10) Highbridge Capital Management

11) Highland Capital Management

12) Pentwater Capital Management

13) Och-Ziff Capital Management

14) Pine River Capital Capital Management

15) Carlson Capital Management

16) Magnetar Capital

17) Mount Kellett Capital Management 

18) Whitebox Advisors

19) QVT Financial 

20) Paloma Partners

21) Weiss Multi-Strategy Advisors

22) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation (Paul Tudor Jones)

8) Tiger Management (Julian Robertson)

9) Discovery Capital Management (Rob Citrone)

10 Moore Capital Management

11) Point72 Asset Management (Steve Cohen)

12) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

13) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Quant and Market Neutral Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Cubist Systematic Strategies (a quant division of Point72)

6) Numeric Investors

7) Analytic Investors

8) AQR Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Princeton Alpha Management

14) Angelo Gordon

15) Quantitative Systematic Strategies

16) Bayesian Capital Management

17) Quadrature Capital

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

49) Polaris Capital Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Viking Global Investors

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) Tiger Global Management (Chase Coleman)

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Penserra Capital Management

29) Eminence Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Marshall Wace

63) Light Street Capital Management

64) Honeycomb Asset Management

65) Rock Springs Capital Management

66) Rubric Capital Management

67) Whale Rock Capital

68) Suvretta Capital Management

69) York Capital Management

70) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Birchview Capital

10) Ghost Tree Capital

11) Sectoral Asset Management

12) Oracle Investment Management

13) Perceptive Advisors

14) Consonance Capital Management

15) Camber Capital Management

16) Redmile Group

17) RTW Investments

18) Bridger Capital Management

19) Boxer Capital

20) Bridgeway Capital Management

21) Cohen & Steers

22) Cardinal Capital Management

23) Munder Capital Management

24) Diamondhill Capital Management 

25) Cortina Asset Management

26) Geneva Capital Management

27) Criterion Capital Management

28) Daruma Capital Management

29) 12 West Capital Management

30) RA Capital Management

31) Sarissa Capital Management

32) Rock Springs Capital Management

33) Senzar Asset Management

34) Southeastern Asset Management

35) Sphera Funds

36) Tang Capital Management

37) Thomson Horstmann & Bryant

38) Venbio Select Advisors

39) Ecor1 Capital

40) Opaleye Management

41) NEA Management Company

42) Great Point Partners

43) Tekla Capital Management

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

39) Victory Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) CI Investments

20) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, the latest round of 13F filings are in with a look at what the most high-profile hedge fund managers have been up to in the last quarter. Bloomberg's Peggy Collins reports on "Bloomberg Daybreak: Americas." (Source: Bloomberg)

More importantly, take the time to watch two great interviews with top macro managers. The first is a CNBC interview with Ray Dalio and the second is a Real Vision interview with Stanley Druckenmiller. I would watch both these clips twice, especially Druckenmiller's full interview which is available here (just awesome and even he got a lot of things wrong but he's ready to pounce when the next downturn strikes).

Thursday, November 15, 2018

The Most Influential Allocators?

Benefits Canada reports, Pension funds comprise more than half of world’s largest asset holders:
The Canada Pension Plan Investment Board is one of the top 20 asset owners in the world, at US$283.45 billion, making it one of the most influential capital allocators in existence, according to a new report by Willis Towers Watson’s Thinking Ahead Institute.

Looking at the world’s 100 largest capital management organizations, which are collectively responsible for US$55 trillion, the report notes these investors have the power to determine the current and future shape of capital markets.

Pensions play a massive role in this arena, since 61 per cent of the capital managed by these top 100 players is controlled by pension funds. Japan’s government pension investment fund controls the most money of any of organization, with more than US$1.4 trillion, followed by Norway’s government pension fund with more than US$1 trillion. Indeed, 10 of the top 20 are pension funds, with the CPPIB sitting at No. 16. Sovereign wealth funds also play a major role, controlling 32 per cent of the capital in the top 100, with outsourced chief investment officers and master trusts making up the remaining seven per cent.

“There is […] a more overarching need for these large asset owners to understand the world in which they operate and over which they potentially hold such influence,” said Roger Urwin, global head of investment content at the Thinking Ahead Institute, in a press release. “Over the next decade, this means doing more to institutionalize professionalism, streamline operating models, leverage culture and diversity more effectively and evolve the investment model into increasingly smart and sustainable arrangements.”
The Thinking Ahead Institute put out a press release revealing the “most influential capital on the planet”:
The Asset Owner 100 – the world’s 100 biggest asset owners – account for around US$19 trillion, or nearly 35% of capital held by all asset owners globally, according to a new report from Willis Towers Watson’s Thinking Ahead Institute.

In its first study of the Asset Owner 100 (AO100), the Thinking Ahead Institute describes this unique group as being responsible for investing the “most influential capital on the planet”, with the discretion to place their capital into any country and into any asset class. As such, the report argues, they have the ability to shape capital markets and to play a key role in the smooth running of the global economy.

Roger Urwin, Global Head of Investment Content at the Thinking Ahead Institute, said:

“With around US$55 trillion in assets - a sum that is more than $10,000 for every adult on the planet - asset owners globally are too important to fail in their mission. They have little choice but to take their financial and social responsibilities seriously, and not to shirk the big issues. These include the need to develop stronger leadership, respond effectively to regulation, manage agency issues and improve control over outcomes.

“There is also a more over-arching need for these large asset owners to understand the world in which they operate, and over which they potentially hold such influence. Over the next decade, this means doing more to institutionalise professionalism, streamline operating models, leverage culture and diversity more effectively and evolve the investment model into increasingly smart and sustainable arrangements.”

The Thinking Ahead Institute’s analysis found that 61% of the assets of the AO100 are held by pension funds, with 32% held by sovereign wealth funds and 7% by outsourced CIOs and Master Trusts. The largest region in terms of assets under management was Asia/Pacific (36%), with 34% in Europe, the Middle East and Africa, and 30% in North America.

The top 20 funds total nearly US$11trillion in assets, accounting for 56% of the total assets of the AO100 (see below).

The full report is availabe here and I encourage you to read it carefully. Below, I provide the highlights:
  • Discretionary assets under management of the world’s 100 largest asset owners totalled US$18.69trillion
  • The top 20 funds total US$10.5 trillion and represent 56% of the assets in the ranking
  • APAC is the largest region in terms of AUM, accounting for 36% of all assets in the ranking
  • EMEA and North America’s assets represented 34% and 30% respectively
The most influential capital on the planet
  • The Asset Owner 100 – the largest 100 asset owners in the world – represent approximately US$19 trillion out of an estimated US$55 trillion in total.
  • These institutional investors warrant particular attention because they have the discretion to place their capital into any country and any asset class that suits them. It follows that their policies and their decisions regarding asset allocation and stewardship shape capital markets and are a key element in the smooth functioning of the global economy.
  • These asset pools are the most influential capital on the planet.
  • These asset owners are spread around the world, and represent a range of types of organisation:
  • The emergence of OCIOs and master trusts as a new category of asset owner reflects the significant increase in the delegation by asset owners of key decisions to external organisations – it is the extent of discretion that is delegated that differentiates these platforms from traditional asset management.
  • The most influential members of this group of 100 asset owners are those who qualify as universal owners. These are organisations that are very large and long-term in horizon that also have a leadership mind-set. Universal ownership acknowledges the influence that investment decisions have beyond the portfolio itself onto wider stakeholders and systemic considerations, and the responsibility and opportunity that comes with that.

Source: Thinking Ahead Institute

What is an asset owner?

In our view, an asset owner has five qualifying characteristics:
  1. Works directly for a defined group of beneficiaries/savers/investors as the manager of their assets in a fiduciary capacity (upholding loyalty and prudence) under delegated responsibility
  2. Works with a sponsoring entity, usually a government, part of government, a company or a not-for-profit
  3. Works within explicit law and possesses an implicit societal license to operate because of its societal trust and legitimacy
  4. Delivers mission-specific outcomes to beneficiaries and stakeholders in the form of various payments or benefits into the future
  5. Employs a business model that combines a governance budget (essentially resources and processes) and a risk budget (reflecting the mix of financial assets that delivers on the mission).
Pension funds are the single biggest group of asset owners meeting all the qualifying criteria above. Sovereign funds, OCIOs, endowments and foundations also fully qualify. Other institutions, such as insurance companies and mutual funds only partly qualify and so have been excluded from this study.
Again, take the time to read the full report which is available here.

There's no question the top 20 global pensions and sovereign wealth funds are part of the most influential allocators on the planet as they account for $11 trillion of the $55 trillion in global assets.

Japan and Norway's pensions are the pension behemoths and China Investment Corporation and Abu Dhabi Investment Authority are the two largest sovereign wealth funds.

It's important to note, however, that influence doesn't just come in the form of capital. Togther, Canada's top ten defined-benefit pensions make up roughly $1.2 trillion in assets but their success has garnered the attention of the world.

When it comes to DB pensions, the Dutch, the Danes and Canadians have found success in their model based on governance, transparency, and attracting talent to manage as many assets as possible internally.

Norway's pension also has great governance and first-rate transparency. I did a report for the Canadian federal government years ago looking at the elements of great governance and found that Norway had a lot of great checks and balances and was extremely transparent but the Fund was slow to invest in private markets which it's only now starting to do.

Anyway, what is interesting is even though the top 20 funds yield enormous power, they all invest in the same large private equity and hedge funds and have made the Dalios and Shwarzmans of this world spectacularly wealthy (sure, they earned it but it helps when the same pools of capital invest in the same funds).

From that vantage point, you wonder who really has the power.

But there's no doubt the top 20 funds have enormous clout and are starting to lend their voices to important causes, like fighting climate change and forcing companies to promote diversity.

In fact, I've had rigorous intellectual discussions with Jonathan Nitzan, professor of political economy at York University, on the role of pensions in capitalism and whether they mitigate or promote inequality and are part of the problem or solution to global warming.

In my opinion, global pensions, sovereign wealth funds and large asset managers like BlackRock, have a very, very important role in determining the future of capitalism and improving our societies.

Jonathan thinks so too but he told me is the problem is pensions act a lot like capitalists focusing on returns, so it's not self-evident they promote social welfare by tackling inequality (I think they help).

Anyway, that's another discussion for another time but I do believe the most influential allocators on the planet must step up to the plate and improve the world we live in.

Below, the story of CPPIB and how it's investing today for your tomorrow. I've said it plenty of times, Canadians have no idea how lucky they are to have CPPIB managing the assets of the Canada Pension Plan. The same goes for Canadians who have access to other large, well-governed defined-benefit pensions. We should never underestimate the value of a good pension.

Wednesday, November 14, 2018

CalSTRS to Divest of Private Prisons?

Chief Investment Officer reports, CalSTRS to Divest of Private Prison Companies:
The investment committee of the California State Teachers’ Retirement System (CalSTRS) has approved divesting its holdings in CoreCivic and GEO Group, the two US publicly held companies running private correctional facilities.

The action by the committee on Nov. 7 makes CalSTRS the third major US public pension fund to divest from the private prison companies. In July, the New York State Common Pension Fund divested from the two correctional companies upon orders from its sole trustee, New York State Controller Thomas DiNapoli.

In 2017, the New York City Pension Funds also divested its holdings in CoreCivic and GEO Group.

While CalSTRS’s global equities and fixed income portfolio holdings in the two companies were worth only around $12 million as of November 6, the divestment by such a large pension plan is expected to shine more light on the companies and their practices. Advocates against private prisons and the federal governments policy of using the private facilities to house immigrant detainees have been pressuring other institutional investors to divest.

CalSTRS is the second-largest pension system in the US with almost $230 billion in assets under management. Combined, CalSTRS and the New York State and New York City plans have almost $600 billion in assets under management, a powerful trio of institutional investors that have said no to private prison companies.

The vote by the CalSTRS Investment Committee comes after CIO Chris Ailman ordered CalSTRS investment staff to conduct a divestment review in July. This came after the Trump administration’s zero tolerance border crossing policy highlighted children being separated from their parents and the housing of detainees, both adults and children, in facilities run by the two private corrections companies.

Several dozen protesters calling on CalSTRS to divest from the two companies had appeared at the July 20 investment committee meeting. It was the same meeting at which Ailman made his decision to conduct the review.

“The board conducted a review of the staff research; we agreed that the engagement efforts were thorough and listened to our expert investment consultants,” said Investment Committee Chair Harry Keiley in a press release issued after the vote on Wednesday. “Based on all the information and advice we were provided, the board decided to divest according to the policy criteria.”

The divestment is scheduled to be completed within six months.

Keiley wasn’t more specific, but the committee wasn’t acting on a recommendation from the investment staff. The CalSTRS investment staff review released Nov. 7 did not take a position either way as to whether the pension system should divest from the private prison companies. The review looked at whether CalSTRS’s investments in the two companies violated its environmental, social, and governance (ESG) policy, which includes respect for human rights and whether the investments in the companies would be jeopardized.

“Staff does not take a position on whether or not private prisons violate the ESG policy to the point of justifying implementation of the CalSTRS Divestment Policy,” the review said. “Staff realizes the operation of prisons (public or private) pose noteworthy risks under the CalSTRS ESG policy. However, in several cases it is the contracting agency, such as the US Government, that creates and carries the risk.”

On the human rights issues, the investment staff report split down the middle pro and con on arguments that the companies were violating detainees’ human rights.

“While staff has been informed by both companies that they were not directly involved in the separation of the family, they did provide capacity for the detention of the parents,” the CalSTRS review noted.

The review said while neither GEO Group nor CoreCivic have facilities to house unaccompanied minors, both have a facility to house detained families. It said the two facilities operate outside San Antonio, Texas, and are designed to keep children with one of their parents.

CalSTRS officials said they toured the facilities and noted detainees were able to roam the grounds, the living units were not locked, and there was no razor wire or weapons carried by staff.

“While staff was not able to obtain evidence that these companies violate the respect for human rights, private prisons do add capacity, and help facilitate a system, that may be viewed as violating the Risk Factor,” the review said.

In an emailed comment to CIO, a GEO Group spokesman defended the company’s practices.

“We believe [CalSTRS’s] decision was based on a deliberate and politically motivated mischaracterization of our role as a long-standing service provider to the government,” the statement said. “Our company has never played a role in policies related to the separation of families, and we have never provided any services for that purpose. We are disappointed that misguided, partisan politics were able to jeopardize the retirement security of California’s educators.”

Officials of CoreCivic could not be immediately reached for comment.

The CalSTRS review disputes GEO Group’s contention that California educators’ retirement security would be affected by divestment. The review said removing the private prison companies from the CalSTRS portfolio does “not pose a significant risk or benefit to the portfolio because they are so small relative to the US equity and fixed income allocations.” CalSTRS’s combined allocations to the asset classes total more than $150 billion compared to its approximate $12 million in holdings of the two prison companies.
The truth is these investments are peanuts for CalSTRS and pose no significant risk to long-term returns but I too wonder whether these divestments were politcally motivated.

Prisons are big business in the US where the prison industrial complex is thriving, especially under a Republican led Senate and a president who wants to be viewed as tough on crime.

The problem with the US prison industrial complex is the criticism that it's a new form of slavery and those enormous profits come from violating basic human rights.

Earlier this month, students at Harvard called the endowment to divest from the prison industry during the first public event held by the newly formed Harvard Prison Divestment Campaign:
The event, hosted at the Law School’s Wasserstein Hall, featured students speakers addressing a near-capacity crowd of roughly 100. Hakeem Angulu '20 and Jackie Wang, a graduate student in African and African American Studies and author of "Carceral Capitalism," began the event by speaking about the history of the American prison system as well as racial disparities in conviction and incarceration rates.

Soon afterwards, organizers projected the campaign’s organizing statement onto a screen.

“The Harvard Prison Divestment Campaign seeks to sever the university’s financial ties to the prison-industrial complex by advocating for Harvard’s total divestment from all corporations whose existence depends on the capture, caging, and control of human beings,” the statement reads.

During the event, organizers also shared an audio tape recorded by Derrick Washington, an inmate at Souza-Baranowski Correctional Center, a maximum security prison in Lancaster, Mass. Washington, who said he had been convicted of murder, described his experiences in the state prison system as well as his later involvement with the Emancipation Initiative, a group that advocates for prisoners.

“Because prison is all of misery and hopelessness — and Harvard readily profits from it — in fact I see as Harvard endorsing every single prison suicide, murder, recidivist and fallen tear drop from the effects of 21st century slavery,” Washington said.

Jarrett M. Drake, a graduate student in Anthropology who co-founded the campaign, said the initiative originated last fall as part of a project for a class on incarceration. He said he developed the campaign with Design School student Samuel A. J. Matthew.

Initially, the two envisioned the project as a way to better inform school affiliates about Harvard’s investments in the “prison industrial complex.” But, after the course ended, he and Matthew decided they “wanted to do something more with the information project.” The duo eventually brought on several organizers to implement a broader initiative.

This October, Drake — along with Anneke F. Dunbar-Gronke, a third-year student at Harvard Law School, and Paul T. Clarke, a graduate student in African and African American Studies — penned a Crimson op-ed criticizing Harvard’s investments in companies associated with the prison industry.

The authors specifically pointed to Harvard’s investments in ETFs that contain stock in private prison operators CoreCivic and GEO Group; Tokio Marine Holdings Inc., an insurer in the bail bond industry; and Axon Enterprise, Inc., the manufacturer of Tasers.

Harvard’s SEC filings for the quarter ending June 30 of this year show holdings in these firms of approximately $67,000. The filings disclose a total $420 million in holdings.

Organizers said they have not directly contacted the Corporation about prison divestment.

Over the years, University administrators have consistently opposed student proposals to change Harvard’s investment strategy — especially when it comes to divesting from fossil fuels, a common undergraduate rallying cry in recent years.

Responding to a question on prison divestment in an itnerview Tuesday, University President Lawrence S. Bacow said that investment decisions should not be used as political tool.

“We’ve stated many times, my predecessors have stated this going back to Derek Bok’s days 40 years ago, that the University should not use the endowment to achieve political ends or particular policy ends," he said. "There are other ways the university tries to influence public policy through our scholarship, through our research, but we don’t think that the endowment is an appropriate way to do that.”

Bacow’s response parallels the position of previous Harvard presidents on divestment movements. In 2013, President Drew G. Faust wrote in a statement on fossil fuel divestment that Harvard’s endowment is “not an instrument to impel social or political change.”

In an interview during the event, Dunbar-Gronke said they believe the University’s investments in prisons are intrinsically political.

“We would like for a depoliticized endowment, and that would mean divesting from a system that is inherently politicized by the fact that it disproportionately affects black, brown, and poor people, and undocumented people, and we as students are in a unique position to hold the University accountable.”

Dunbar-Gronke also said they think Harvard's investments run contrary to the University’s efforts to address its ties to slavery.

“Harvard has expressed remorse for its institution in slavery, but that we are currently still investing in a legacy of slavery, so cannot be fully contrite until we stop investing in it," they said.

After presentations by speakers Thursday, participants broke off into smaller, off-the-record group discussions.
My thoughts? I'm on record stating it's silly to divest from fossil fuels and apart from tobacco where engagement is futile and divestment makes a lot of sense, I'm generally not comfortable with the rush to divest from investments.

Now, in the case of US prisons, there are serious concerns, I do believe there's institutional racism and slavery so corporations can profit, but even there, wouldn't you want a big pension engaging and forcing change from within?

The minute these big pension funds divest, someone else takes their place, a public or private equity fund that doesn't give a rat's ass about ESG, only big fat profits, and basically nothing gets done to change the condition of US prisons.

Again, these investments are peanuts for CalSTRS or Harvard, but I'm not sure divesting is doing the inmates any favors. In fact, I think they're going to be worse off if big pensions divest.

In other California news, Chief Investment Officer reports, CalPERS CIO Leaves Friday, but Replacement Delayed:
California Public Employees’ Retirement System (CalPERS) Chief Investment Officer Ted Eliopoulos is ending his 17-year tenure at the largest US public pension plan on Friday, but his replacement, Yu Ben Meng, remains stuck in China and will be unable to take over the investment reins of the $361.1 billion retirement plan until sometime in January.

Both Eliopoulos’ impending departure and the fact that Meng’s start date won’t be until sometime in January were announced at the pension plan’s investment committee meeting on November 13. CIO had reported before the meeting that Meng could not start sooner because he has a non-compete agreement with the Chinese government following his three-year tenure as deputy CIO at China’s State Administration of Foreign Exchange.

The agreement has prevented Meng, who was named CalPERS CIO in September, from joining the pension plan. Meng is also being prevented by the Chinese government from leaving the country until the non-compete expires, said former CalPERS board member and investment officer J.J. Jelincic. Jelincic has said he has had phone conversations with Meng from China. Several CalPERS sources confirmed Jelincic’s account to CIO.

Eliopoulos, in brief comment at the investment committee meeting, said that Eric Baggesen, a managing investment director who directs the pension plan’s asset allocation efforts, would take over as interim CIO until Meng starts in January. Meng had previously worked at CalPERS and had been one of the investment leaders of asset allocation efforts.

It is unclear exactly when Meng’s non-compete expires and CalPERS officials on Tuesday weren’t specific as to what date in January Meng would start at the pension plan.

Meng had a senior leadership role in investing more than $1 trillion in China’s foreign currency reserves, including US dollars that were invested in Treasuries and US-listed equities. He is a US citizen, but was born in China

That may be part of his problem in terms of leaving the country.

“China treats people born in China as if they were Chinese citizens, even if they have acquired citizenship elsewhere,” Nicholas Yardy, a senior fellow at the Peterson Institute for International Economics and an expert on the Chinese economy, told CIO in an email.

In a surprise announcement in May, Eliopoulos said he would be stepping aside by the end of the year because of health considerations of one of his daughters who is attending college in New York City. Eliopoulos said it is important that he is within “reasonable distance” of his daughter.

Eliopoulos joined CalPERS in January 2007, and served as senior investment officer for the pension plan’s real estate asset class. He oversaw the portfolio during the great financial crisis when it lost more than 48% of its value. He was tasked with rebuilding the portfolio, reducing speculative office and land deals in place of a new emphasis on core real estate assets. In 2014, he assumed the role of CIO following the death of Joseph Dear from prostate cancer.

CalPERS officials and board members had originally hoped that the new CIO could work aside Eliopoulos for several months before he left CalPERS.

It is a particularly critical time for the largest US public pension plan. CalPERS officials are hoping to launch CalPERS Direct, a private equity organization that would invest in later-stage companies in the venture capital cycle as well as buy and hold stakes in established companies, similar to Warren Buffett’s strategy.

Eliopoulos in his remarks on Tuesday thanked CalPERS staff for their support during his tenure but did not address the fact that he would not be working side-by-side with Meng.

It is unclear if the investment committee will vote on the $20 billion direct investment organization at its December meeting or wait until after Meng takes over as CIO.

If CalPERS Direct becomes a reality, Eliopoulos won’t be around to see his biggest idea implemented. Eliopoulos had formally proposed the private equity direct investment organization, the first of its kind for a public pension plan in the US, in July 2017.

CalPERS has one more investment committee meeting this year scheduled for Dec. 17, which is the last meeting for Priva Mathur, the president of the CalPERS board and a proponent of the direct private equity investment organization. Mathur was defeated in a bid for reelection. The investment committee is made up of all 13 CalPERS board members.

Sources say that Mathur has told fellow board members that she would like CalPERS Direct approved before she leaves her post in early January.
I doubt the Board will vote on CalPERS Direct prior to Meng taking over as CIO. It's an important and much-needed initiative but typically you wait for the new CIO to be in place before voting on something like that.

As for Ted Eliopoulos, I wish him all the best in his new endeavor whatever it is and I hope his daughter is healthy and enjoys her college years in New York City.

Below, CalSTRS Chief Investment Officer Christopher Ailman speaks with CNBC’s 'Squawk on the Street' about the pension fund’s push for the gun industry to implement more stringent safety principles. He also discusses the recent volatility and how CalSTRS is reducing risk but remains focused on the long run.

I also embedded an MSNBC documentary which reports on the brutal stark reality of US maximum security prisons (warning: some parts are disturbing).

Lastly, a clip on a new documentary film, American Jail, where Academy Award-winning filmmaker Roger Ross Williams investigates America's mass incarceration crisis. I saw this documentary over the summer, it was excellent and highlighted the many problems at American prisons.