Friday, May 25, 2018

Get Set For a Wave of Defaults?

Jeff Cox of CNBC reports, Moody's warns of 'particularly large' wave of junk bond defaults ahead:
With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

The "prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," Mariarosa Verde, Moody's senior credit officer, said in a report. "The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."

In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.

"Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt," Verde wrote. "A number of very weak issuers are living on borrowed time while benign conditions last."

The level of speculative-grade issuance peaked in the U.S. in 2013, at $334.5 billion, according to the Securities Industry and Financial Markets Association. American companies have $8.8 trillion in total outstanding debt, a 49 percent increase since the Great Recession ended in 2009.

During that time, there's been a strong divergence in debt issuance, with investment-grade firms (shown below in the green line) pulling back as a share of total debt issuance, while speculative grade debt (the blue line) has increased.

Credit conditions have been conducive to lower-rated companies going to market, as global central banks have kept rates low and helped keep liquidity flowing through the system.

That's had some positive impacts, as smaller firms with greater access to capital have been able to implement game-changing technologies into multiple industries, particularly energy.

At the same time, higher-rated companies have been issuing debt and using it to reward shareholders with buybacks and dividends. As a result, their debt, while still investment grade, often has fallen a few notches, with the very top of the ladder shrinking from 21 percent pre-crisis to 14 percent currently.

Moody's warned that the trend could result in more "fallen angels," or companies that see their pristine ratings dinged as they continue to roll up debt.

Overall, median debt when compared with EBITDA has risen 30 percent for investment-grade companies and 10 percent for speculative.

"For many speculative-grade issuers, debt capacity may have reached its limit but structural protections continue to weaken," Verde said. "Many of these highly leveraged borrowers have more latitude than at any other time in the past to engage in potentially credit-eroding activities such as asset sales or debt-accretive transactions without needing to get lender consent."

Lower-rated companies have managed to keep their defaults below the historical average even though their credit metrics are "deeply stretched," Verde added.

"This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default," she wrote. "These companies are poised to default when credit conditions eventually become more difficult."
By the way, you might be interested in knowing who owns all this US corporate debt:

Welcome to the zombie economy, central banks kept rates ultra-low for so long that companies went on a massive borrowing binge and investors keep pumping billions into high yield debt.

Large companies borrowed to reward shareholders via share buybacks and increases in dividends, but they're mostly rewarding themselves as they manipulate earnings per share to artificially inflate their numbers and reap rewards through their bloated executive compensation scheme (based on EPS).

Smaller companies are borrowing because they need to in order to survive as many would be out of business if they couldn't borrow to run their operations.

Don't you just love modern day financial capitalism? If Marx were alive today, he would be fascinated (but not shocked) with the gross subsidization of the financial sector through "radical" monetary policy and of course direct government lending, like the famous TARP program which admittedly was paid back in full no thanks to record amount of financial and non-financial borrowing.

Anyway, as I keep repeating, pay attention to high-yield, aka junk bonds (HYG, JNK) because this remains the canary in the coal mine (click on images):

As shown above, both junk bond ETFs are hovering around  their 50-week moving average so there is no imminent threat right now but if prices continue to decline or plunge (ie, spreads blow up), you should definitely take note because it could signal big trouble ahead.

When people ask me why I'm so bullish on US long bonds (TLT), I tell them it's not so much that I'm bullish on Treasuries because I hate stocks and other risk assets but it's because the global economy is slowing, risks are rising and you need to hedge downside risks. And I have yet to find a better hedge than Treasuries which remain the ultimate diversifier.

Don't get me wrong, I still risk my own capital and sometimes I take big risks. Today, I was looking at shares of Mirati Therapeutics (MRTX) and wanted to kill myself because at one point, I owned 5000 shares at $5 and dumped them 50 cents higher right before the stock got slammed and hit a 52-week low of $2.70. The rest, as they say, is history (click on images):

Admittedly, this is like winning a lottery but believe it or not, trading biotechs, I've seen this movie a few times!!

Oh well, c'est la vie, just goes to show you sometimes you need to stop trading and just stay put (easier said than done when you're losing money as a position swings like a yo-yo but that's the nature of the biotech beast).

However, I've also witnessed plenty of biotech horror shows and counted my lucky stars I wasn't invested in them (click on images):

Like I said, it's the binary nature of the biotech beast, if you get caught in a big position, you can easily face the risk of ruin.

But it's not just biotech, I've seen plenty of big dips in my trading career and some really nasty ones in stocks like Macy's (M), Kroger (KR), General Electric (GE) and more recently Symantec (SYMC):

When people ask me "Why BONDS??", I tell them: "Because you never know what nasty surprises are lurking around the corner. Never."

Right now, things are perking up in Europe, emerging markets and those are risks we are aware of. By definition, you can measure risk, you can't measure uncertainty.

If you get caught in a brutal sell-off, you have two choices: 1) cut your losses and eat them or 2) add to your position to average down HOPING the shares will recover. Both options are painful, trust me.

Earlier this week, my father and I were talking about how it's been a while since we had a financial crisis. He was grumbling about how "Nortel was a scam and John Dunn was the only one who made money" and I told him "It was Frank Dunn and there was plenty of blame to go around".

[Note: I'll never forget a senior VP meeting at the Caisse when then CIO (Pierre something, I forget his name) was pounding the table to buy more shares of Nortel as they declined and most people agreed but if I remember correctly, Adel Sarwat wasn't too gung-ho about it but reluctantly said yes.]

My dad also asked me: "What ever happened to Lehman Brothers?" I replied: "Finito caputo!"

"You see, they're all crooks like that Dunn guy!", he said.

Why am I sharing all this with you? Because if you've been around long enough, you know one thing about markets, trends don't last forever and when the trend changes, it could be violent and it could take a very long time before things get back to normal.

In my opinion, the longer we go without a crisis and recession, the worse it will be when it strikes, both in terms of magnitude and duration.

So enjoy riding the wave in junk bonds, stocks and other risk assets, because when the tsunami strikes, it won't be pretty.

Below, Erik Townsend and Patrick Ceresna welcome Dr. Lacy Hunt to MacroVoices. I want you all to take the time to listen carefully to Lacy Hunt as he explains why the (Treasury) bond bull market isn't over and why we cannot get out of the current predicament through more debt and why it will take a long time to recover after the next crisis hits. You can also download the podcast transcript here.

I end by wishing my US readers a nice long Memorial Day weekend and by thanking my loyal subscribers and donators. If you haven't donated to this blog, please do so through Paypal on the right-hand side, under my picture. Thank you and enjoy your weekend!

Thursday, May 24, 2018

Canada's Public Service Pension Problem?

Frederick Vettese, partner of Morneau Shepell and author of “Retirement Income for Life: Getting More without Saving More”, wrote a special for the Globe and Mail, When it comes to pensions, don’t follow Ottawa’s example:
It is a sad fact that only 20 per cent of private-sector workers are covered by pension plans in their workplace. In stark contrast, nearly 100 per cent of public-sector workers are covered. Of course, none of this is news; pension envy among private-sector workers is as Canadian as hockey and Timbits.

What is perhaps more interesting and less well understood is the garbled message the government is sending with the pension programs it provides to its own employees. I will single out the federal Public Service Pension Plan (PSPP), not only because it has more than half a million members, or because it is generous even by public-sector standards, but also because the federal government has the power to effect change in a way that would benefit millions of Canadians.

The classic defence of plans such as the PSPP is that everyone benefits when civil servants can retire in dignity. Besides the obvious advantages for the participants themselves, good government-sponsored pension plans create a benchmark for other employers to emulate.

In the case of the federal government, however, this rationale contains a fatal flaw. The last thing the federal government would ever want is for all private-sector employers to adopt pension plans like the PSPP. The consequences would be disastrous for both the Canadian labour force and for tax revenues.

Consider the labour force first. At present, we have about four workers for every retiree. Fifty years ago, that ratio was 6.6 to 1 and in another 20 years it is forecast to dwindle to just 2.3 to 1. Barring a robotic revolution, we will probably not have enough workers to keep the economy running.

Don’t count on immigration to make up for the looming shortage of workers. It is already running at the highest rate in a century (with the exception of 1956, when the Hungarian refugee crisis occurred); the general public is unlikely to want to see immigration rise much more, even if we had the infrastructure to support it.

A higher birth rate is another possible way to change the worker-to-retiree ratio, but it is not clear what, if anything, would cause the birth rate to rise any time soon. Besides, the impact on the worker-to-retiree ratio would be negligible for at least 30 years.

The inescapable conclusion is that the only viable way to ensure there will be enough workers in the future is to encourage people to keep working longer. Alas, the federal PSPP does just the opposite. The plan’s retirement rules incentivize long-term civil servants to retire as early as age 50. If private-sector employers had maintained similar pension plans all along, the labour force today would have roughly one million fewer workers.

The effect on income-tax revenues if everyone had a PSPP-like pension plan would be equally damaging. A C.D. Howe paper by Malcolm Hamilton estimates that the average Canadian worker contributes about 14.1 per cent of pay toward retirement. (This includes employee and employer contributions to registered retirement savings plans and pension plans but not tax-free savings accounts.) In the case of federal public-sector workers, the contribution rate could exceed 25 per cent in a year when the PSSP has a big deficit. If private-sector workers (and their employers) made tax-deductible contributions at that rate, overall tax revenues would drop by more than $15-billion a year. Clearly, the federal government would never allow this to happen.

The time has, therefore, come to change the federal PSPP to better reflect the public interest. (Or actually, to change it further. Some amendments were made during the Harper era though they did not go nearly far enough.) The plan is a relic from an era during which the country had more potential workers than the economy could absorb but this is no longer the case.

So what should the federal government do to set a good example for private-sector employers? First, it should remove all incentives within the PSPP to retire early. Employees could still retire early, of course, but with the same penalty that applies to all participants in the Canada Pension Plan. Retiring early in comfort may require them to save a little extra in an RRSP and/or a TFSA, the same as what most other Canadians already do.

Second, it should reduce total employee and employer contributions under the PSPP to 18 per cent of pay, including any deficit payments that may have to be made in the future. Even at 18 per cent, the amounts being contributed by, and on behalf of, federal civil servants would still be at the high end of the spectrum.

Of course, these recommendations will not go over well with all stakeholders. No doubt the public-sector unions would strenuously defend the status quo on the basis that PSPP members contribute a high percentage of pay and should be entitled to a generous pension benefit in return. On this point, I would note that over the 12-year period from 2006 to 2017, PSPP contributions by members constituted barely one-third of total contributions (37 per cent to be exact). In most large public-sector plans, member contributions fund 50 per cent of the total pension cost and that includes the cost of paying off any plan deficits that may arise. It is time the federal PSPP fell into line.

The effect of the suggested changes would not be felt immediately since new retirement rules can be applied only to future service. They are, nevertheless, important if the federal government truly wants to set a good pension example for the rest of the country.
I shared this article with two of Canada's best actuaries, Bernard Dussault, Canada's former Chief Actuary, and Malcolm Hamilton, a retired actuary who worked many years as a partner at Mercer and now writes policy papers for the C.D. Howe Institute.

Not surprisingly, Malcolm agreed with the author:
I agree that the federal PSPP is, from the taxpayers' perspective, a disgrace and that something should be done about it.

My description of the problem, and how best to solve it, is quite different.
Bernard provided a little more analysis and questioned the author's claims:
This article fails to point out that the federal government already took measures a few years ago to address the unduly rising cost of the Pension Plan for the Public Service of Canada (PPPSC) mainly by increasing the pensionable age from 60 to 65 for members hired after 2012.

As can be seen in Table 4 on page 9 of the actuarial report on the Pension Plan for the Public Service of Canada (PPPSC) as at March 31, 2014 (, its current service cost is about 17.5% of payroll for the post-2012 hires, shared equally by the members and the government (employer), which is appreciably lower that the about 20.7% cost for pre-2013 hires. This favourably happens to fall below the prescribed fiscal 18% limit above which pension contributions are immediately subject to income taxes.

In other words, the government pays less than 9% of payroll for the post-2012 hires' pensions, which in my view is reasonable considering the important role that pension plans play for the alleviation of seniors' poverty.
Malcolm then followed up to state the following:
I think that you need to add a couple of things.

First, Bernard's description of the changes to the PSPP is quite misleading. Many members hired after 2012, specifically those hired under the age of 30, will be able to retire at the age of 60, not 65 as Bernard contends.

More importantly, only 50% of the cost of the PSPP is covered by contributions. The other 50% is covered by risk-taking. Since taxpayers bear all of this risk, they end up paying much more than Bernard suggests. For this, we can thank defective public sector accounting standards, which allow governments to claim, as does Bernard, that pension plans costing 40% of pay really cost 20% of pay.

In private sector financial statements, this would simply not be tolerated.
I thank Malcolm and Bernard for sharing their insights with me on this article.

I actually agree with both of them to a certain extent but let me explain. Like the author, Fred Vettese, Malcolm paints an overly dire portrait of the federal Public Service Pension Plan (PSPP).

For his part, Bernard points out facts which contradict the author's claims but he too doesn't address some issues which the author is right to point out and as such, is overly optimistic in his assessment.

In my opinion, the most important point that Fred Vettese addresses is the demographic shift going on in Canada (and elsewhere) where in a few years, we will have more retirees than active workers.

You know where I'm getting at with this? That's right, I want to see the federal Public Service Pension Plan (PSPP) adopt a shared-risk model which forces intergenerational equity.

In particular, I want to see conditional inflation protection adopted so if the plan experiences a deficit, retired members will experience a cut in inflation protection for some time until the plan is fully funded again.

In fact, conditional inflation protection is a critical factor behind HOOPP and OTPP's success and that of other fully funded plans in Canada.

It's mind-boggling that in 2018 we still have public sector unions demanding guaranteed inflation protection as if the rest of society owes it to them no matter what.

I'm sorry, I'm an ardent defender of defined-benefit plans but I absolutely need to see two key elements: 1) world-class governance and 2) a shared-risk model where if needed, contributions are raised, benefits cut (typically for a short time using conditional inflation protection) and/ or both.

We need to defend DB pensions but we also need to make them fairer and more sustainable over the long run.

One thing the article above doesn't address because it's a bit confusing is PSP Investments was incorporated as a Crown corporation under the Public Sector Pension Investment Board Act in 1999 to fund retirement benefits under the Plans for service after April 1, 2000, for the Public Service, Canadian Armed Forces, Royal Canadian Mounted Police, and after March 1, 2007, for the Reserve Force.

Notice it's focused on the funding needs of the Plans for service after April 1, 2000, and doing a great job providing an annualized return well above the required actuarial return set by the Chief Actuary of Canada. You can see PSP's fast facts on the Public Service Pension Plan here.

What about the funding needs of the Plans before April 1, 2000? Thus far, PSP hasn't had to worry about those, they are debt which is funded from the federal government's General Account but if they were all of a sudden responsible to fund those retirement benefits, it would be a big deal for the organization and put additional pressure on it because those Plans are in a deficit.

In my opinion, PSP should be responsible for funding pre-April 2000 Plans as well and this too would be fairer for taxpayers, not to mention better for all stakeholders.

I don't want to get into too much detail here but it's a big issue which is currently being discussed in Ottawa (it's been discussed for what seems far too long).

Lastly, I remind all of you that municipal and provincial debt isn't factored into total debt in Canada much like state and local debt are not included in the US federal balance sheet:

I mention this because I had a conversation with a friend of mine in Ontario who was asking me if the Ontario Government uses the pension surpluses to pad that province's balance sheet and I said: "of course it does". He then asked me if the Ontario Government can use those surpluses to spend on programs and I said: "of course not".

He also asked me why they're not amalgamating all these provincial public pensions (including HOOPP which is private) so the province can save costs. I told him it's never going to happen and there would be huge pushback if it did.

I leave you on this note, Canada's pension problems are a joke compared to what is going on in the United States.

Below, Thad Calabrese, NYU, and Kuyler Crocker, Tulare County Board of Supervisors, discuss why cities are investing in the market through the issuance of pension bonds.

Listen carefully to this discussion and especially listen to what professor Calabrese states on these pension bonds, he's spot on but he too neglects mention the real problem behind state and local pension deficits: years of neglect/ mismanagement, poor governance and no shared risk model.

Wednesday, May 23, 2018

Are Smaller Hedge Funds Worth It?

Thomas Franck of CNBC reports, If you want to run a hedge fund that beats the market, keep it small:
Successful hedge fund managers should do something unusual if they want to stay that way: Say no to new investors.

The bigger a hedge fund gets, the worst it tends to perform, according to a new academic study.

Holding other features constant, a 10 percent increase in fund size results­­­ in a decrease of 13 basis points per month (or 1.53 percent per year) in raw returns on average and a decrease of 10 basis points per month (or 1.21 percent per year) in style-adjusted returns, according to the paper from Purdue University.

"A key implication of our findings for investors is that performance persistence is achievable when funds maintain a small size," researchers Chao Gao, Tim Haight and Chengdong Yin wrote. "Fund performance declines with fund age and that declining performance is not significantly related to a variety of fund and family-level characteristics, nor is it significantly related to young funds assuming higher downside risk."

The paper clarifies prior literature that found that hedge fund performance peaks during the first few years of a fund's life, but declines thereafter at an average rate of 42 basis points per year.

The decline in performance, according to the Purdue researchers, appears to be due to managers taking their eye of the ball and focusing more on asset gathering (and the steady fees that come with them) rather than investing.

Other studies hold that historical compensation contracts in the hedge fund industry, such as 2 percent management and 20 percent performance fees, is not effective at aligning managers' incentives with investors' interests.

Yin's 2016 study, for example, demonstrates that the management fee comprises a larger portion of total compensation when funds grow large and thus a fund's optimal size, from a compensation perspective, exceeds the size that is optimal for performance.

The research comes amid an ongoing move by funds to offer more competitive fee structures amid lackluster performance, declining revenues and rapidly evaporating investor patience.

"When funds grow large, fund managers may have less incentive to improve fund performance because most of their compensation comes from the asset-based management fee," the researchers concluded. "Thus, investing in small funds, regardless of age, may provide for superior and sustainable returns."
Ah, the old large versus small hedge fund debate. A few years ago, Barron's had a similar comment on how small hedge funds outperform bigger rivals but CNBC then responded by stating bigger is better.

Let me cut to the chase and give you my quick takeaways:
  • No doubt, smaller hedge funds that survive their first year in operation are by definition hungrier for performance and much more focused on performance. Why? Because in order to survive, they need to perform and raise their assets under management to a decent level over the first three years.
  • What is the critical threshold for assets under management? It depends on the strategy but some say it's $300 million, some $500 million and some over $1 billion to survive and deal with all the regulatory, compliance and institutional demands.
  • Large hedge funds are able to address all these demands. They also have a lot of money to pay their people well which allows them to attract the best talent. So, it's not true that all large hedge funds are lazy asset gatherers who stopped focusing on performance. Many are but there are plenty very much still focused on performance and if they weren't, they'd be out of business
  • I can also tell you there are A LOT of crappy small funds which is why most investors don't bother with them, preferring to focus on the 'best of breed' large funds which are scalable and offer them peace of mind (if they blow up, less career risk since other large institutions also invested in them).  
Anyway, I had lunch with Andrew Claerhout, the former head of Infrastructure and Natural Resources at Ontario Teachers' Pension Plan and Greg Doyle, Vice-President of Pension Investments at Kruger.

It was actually the second day in a row I met up with Andrew for lunch and it was a pleasure meeting him in person in Montreal where he was visiting for a couple of days.

I've said this before and I'll say it again, Teachers' screwed up big time letting go of such outstanding talent. Andrew should have been the next CEO of Ontario Teachers', he's very intelligent, super nice and an outstanding leader (following his departure, the CIO "resigned" and there were a couple of senior managing directors that left Teachers' Private Capital to start their own PE fund).

Anyway, Andrew, Greg and I had a great lunch, we enjoyed the nice weather and I enjoyed listening to them talk private equity, infrastructure, renewable energy and more. Greg was especially chatty and he's a bright guy, reminds me a lot of Mike Keenan over at Bimcor (BCE's pension plan).

Andrew really knows his stuff too, said there was a value creation plan behind every investment and "no investment was made unless we figured out a way to improve operations and unlock value".

Honestly, the guy should write a book or a guest blog comment because he spent 13 years at Ontario Teachers' first working in private equity (Mark Wiseman hired him) and then heading up infrastructure and natural resources over the last four years. He's seen a lot and he's no passive investor, he enjoys getting into the operational weeds.

We talked about the climate for fundraising. Earlier today, I sent Andrew a Bloomberg article on how Carlyle's co-founder David Rubenstein sees more money flowing into private equity than at any time in his three-decade career.

Rubenstein is a master at raising funds. Greg Doyle has met him (and plenty of other big shots) but he remembers him saying: "It takes six months to launch an IPO and 18 months on average to raise money and close a private equity fund."

You see, even in private equity, the fundraising might be great for the large, well-known funds, but it's no cake walk and it's brutal for smaller funds, many of which are struggling to survive.

Still, just like in hedge funds, there are some excellent small or medium-sized private equity funds (I can think of one excellent medium-sized PE fund in Canada, Searchlight Capital, founded by Erol Uzumeri who used to work at Teachers' Private Capital, Eric Zinderhofer from Apollo and Oliver Harmann from KKR).

Many institutional investors love private equity, it's their best asset class and they like it even if it's illiquid because the alignment of interests are there and so is long-term performance.

My last comment was all about how CalPERS is bringing private equity in-house, trying to emulate what Canada's large pensions are doing through fund investments and co-investments on larger transactions (a form of direct investing which lowers overall fees but it’s not pure direct investing).

Anyway, today I wanted to talk about hedge funds, especially smaller hedge funds.

There are some talented absolute return managers in Canada that are run by excellent managers but for one reason or another, they don't make it on consultants' lists of funds to invest in.

I hate the cookie-cutter approach where you need to check off all the boxes and think it's really worth  meeting managers one by one to understand their strategy, performance and people.

For example, in Montreal, I've already referred to the folks at Crystalline Management, one of the oldest hedge funds in the country which will soon celebrate its 20-year anniversary. Marc Amirault and his team have done a great job running a couple of arbitrage strategies and they have grown their assets very carefully (I think they're way too conservative and have told them so but it's what they're comfortable with).

But there are other emerging managers, some that received mandates from PGEQ. Quite frankly, the biggest problem in Quebec and rest of Canada is we lack a billionaire Bass family like they have in Texas to fund new private equity and hedge funds on a much larger scale.

We desperately need big billionaires with big cojones writing big seed tickets. I'm dead serious about this. The PGEQ is fine but we need something much, much bigger, preferably backed by large family offices since big pension funds aren't into taking big seed risks.

[Note: In March, CPPIB announced it made initial investments of as much as $250 million each in five startups and young hedge funds under its Emerging Managers Program in the past two years. None of these fledgling hedge funds are Canadian. Read details here.]

I see guys like Karl Gauvin and Paul Turcotte at OpenMind Capital trying to get assets under management and offering institutional quality volatility funds. Go see them, kick the tires, talk to them and you'll see they know what they're talking about.

But there are other less well-known players, slowly gathering assets under management, people I've worked with in the past. One of them is Francois Laplante who runs Folco Strategy Partners and is posting outstanding absolute return numbers.

I know Francois from my days at the National Bank going back almost 20 years. He and Philippe Couture were the only traders who survived and are still trading for a living (Philippe trades his own money and doesn't want to manage outside money).

Francois runs a segregated account using Interactive Brokers platform and charges low fees (1.25% management fee and 10% carry) because his costs are low. It's fully transparent, the client owns the account and can get out at any time, and he can run all the trades pari passu through this structure (by the way, OpenMind uses the same IB structure and also charges low fees).

I had lunch with him a couple of weeks ago and asked him to give me a brief description of his strategy/ edge:
Folco Strategy Partners equity long/short seeks to generate annual returns of 10% (net of fees) with a risk target lower than equity markets. We have a contrarian approach and we
focus on REITs and other defensive real asset industries such as renewable energy, rails, energy infrastructures, independent power producers, pipelines, utilities and telcos. The strategy offers a very low correlation to the equity market.

Our unique proprietary top-down and bottom-up investment process uses a combination of fundamental and technical analysis.

We focus on our sectors of expertise and remain disciplined at all times. We believe publicly-traded real asset sectors are occasionally mispriced, and we use these opportunities to our advantage.

We may invest or short securities in other sectors to seize opportunities or minimize downside risk (maximum 20% of AUM). We establish our geographic and segment exposures based on regional growth perspectives, currency impact and supply/demand dynamics The manager has a significant personal investment in the strategy. I am the biggest investor.
I highly suggest you contact him at  Folco Strategy Partners and do your own due diligence. A guy who has traded this long and in size (he ran big ALM desk at Desjardins) really knows his stuff and he's posting incredible numbers (a couple of investors I brought to him didn't believe it but one was so impressed, he already invested with him after visiting his office and kicking the tires).

All this to say, everyone loves big hedge funds, I too track what top funds are buying and selling every quarter, but it's worth keeping your eyes and ears open for smaller hedge funds that aren't brand names but often (not always) offer much better returns and alignment of interests.

In my humble opinion, the best investors positioned to invest in smaller hedge funds are large family offices who aren't afraid to take some smart risks.

Large pension funds can also seed smaller hedge funds through a fund of funds structure or some other structure (like PGEQ) but they move at a very slow pace and there just not interested in allocating risk to such a venture and when they do, it moves at glacial speed.

Let's face it, big pensions looking for scale want to write big tickets to a few big players. That will never change but maybe they need to rethink their approach and allocate some risk to smaller hedge funds.

Below, CNBC's Leslie Picker reports that hedge funds are raking in the money. The big hedge funds are getting bigger but this leads to crowded trades which is why returns are dwindling over time.

Update: Charles Lemay, Vice-President Business Development at Landry Investment Management, shared this with me after reading this comment (added emphasis is mine):
Great article Leo, 100% agree. When interests are aligned and the PM/employees have skin in the game...motivation to perform and succeed is much higher. You find this much more often in smaller shops vs larger ones who have “made it” and can afford to pay the bigger salaries so the PMs/employees get complacent. It’s not always true but like Vital Proulx said at the EMB event a couple weeks ago...graduating from being an emerging manager to above a billion is one have a sustainable business now...but keeping that drive and motivation to keep performing and growing to your “sweet spot” AUM for you strategy is very important. We need more stories like Hexavest (like your billionaire Bass family) who made it from nothing to $20B and have kept the engine going. Vital doesn’t need to work...but his passion is there, he loves what he does and wants to keep going. And yes PGEQ needs to get bigger...much bigger.
I thank Charles for sending me this and agree with Vital Proulx's wise advice, no matter how big you get, you need to keep the drive and motivation alive and that's been the secret behind Hexavest's success.

And just so you know, Hexavest recently announced it hired Vincent Deslisle as the co-CIO to help Vital and Jean-Pierre Couture, the Chief Economist. Good move, Vincent has a lot of passion for investment research and he's a very nice guy too.

Tuesday, May 22, 2018

CalPERS Bringing Private Equity In-house?

Mark Anderson of the Sacramento Business Journal reports, CalPERS bringing private equity in-house:
The California Public Employees’ Retirement System has said it will create a separate entity to make direct private equity investments.

Last week, the $349 billion Sacramento-based pension fund unveiled what it will call CalPERS Direct. Poised to launch in the first half of next year, CalPERS Direct will consist of two funds. One will focus on late-stage investments in technology, life sciences and health care, and the other fund will focus on long-term investments in established companies, CalPERS said in a news release. The pension fund plans to invest about $13 billion a year in private equity deals, with a goal of having 10 percent of its investment portfolio in private equity.

“Our investment team has spent months exploring options in order to design an approach to private equity that takes advantage of our size and brand,” CalPERS chief investment officer Ted Eliopoulos said in a news release. “We believe it will drive stronger private equity returns and help achieve economies of scale over time.”

CalPERS' move to create its own private equity investment vehicle is the latest step in its transition away from hiring outside money managers, as the pension fund looks to cut down its expenses on commissions and fees. CalPERS has already internalized 75 percent of its asset management, with most of that invested in publicly traded assets, Eliopoulos said in an interview on Bloomberg Television.

CalPERS Direct will be governed by a separate, independent board, Eliopoulos said. That structure “allows us to access the talent we need to invest in the private marketplace,” he said on Bloomberg Television.

As a separate entity, CalPERS Direct will be able to pay high enough compensation to bring in top investment talent, Eliopoulos said. If the new private equity managers were CalPERS employees, they would have to be hired under state government pay scales.

Through external fund managers, CalPERS has been investing in private equity since the early 1990s. Over the past 20 years, it's been the pension fund’s highest-returning asset class, with a 10.6 percent annual return, according to CalPERS.
Joshua Franklin of Reuters also reports, CalPERS to build $13 bln in-house private equity funds:
The largest U.S. public pension fund plans to set up two funds managing up to $13 billion to invest directly in leveraged buyouts, it said on Thursday, underscoring how major investors are looking to lessen their dependency on private equity firms.

The decision by the California Public Employees’ Retirement System (CalPERS), which manages $349 billion, follows similar moves by Canadian funds to staff up on direct investment teams in an effort to save money in fees in private equity firms.

Investing directly by leading one’s own deals goes a step beyond what some large pension and sovereign wealth funds have done in recent years, which is to team up with private equity firms to co-invest in corporate takeovers.

“We believe it will drive stronger private equity returns and help achieve economies of scale over time,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement.

Private equity firms buy companies with the expectation of selling them a few years down the line for a profit. The industry pulled in a record amount of cash last year as investors turned to the asset class for public-market-beating returns.

However, larger money managers are keen to cut down on paying the fees demanded by firms, which typically collect a roughly 1.5 management fee and a 20 percent cut of any profits.

“The move by CalPERS is part of a broader trend amongst large institutional LPs, led by large Canadian pension, looking to disintermediate traditional fund managers to lower the cost of private equity and venture capital investment,” said James Gelfer, senior analyst at financial data firm PitchBook.

CalPERS Direct, which is expected to begin work in 2019 subject to final board approval and would only invest CalPERS money, would be made up of two funds. The first would target late-stage investments in technology, life sciences and healthcare, and the second on long-term investments in established companies.

CalPERS said its private equity program, which began in the early 1990s, has been the fund’s highest-returning asset class over the last two decades.

CalPERS in February said it lost 4.6 percent in value during the stock market’s tumble earlier this year, highlighting the appeal of private markets.
In related news, Arleen Jacobius of Pensions & Investments reports, CalPERS on lookout for emerging manager private equity fund-of-funds manager:
CalPERS is searching for a manager to run its private equity emerging manager program, said Megan White, spokeswoman for the $355.9 billion pension fund.

CalPERS launched the search in April in which it invited a targeted list of firms to compete, with responses due May 24. Incumbent Grosvenor Capital Management has been invited to rebid. Its contract expires in October. A hiring decision is expected in the fall.

Officials of the Sacramento-based California Public Employees' Retirement System have said they planned to commit up to $500 million in new capital to its private equity emerging manager fund-of-funds program between June 2016 when the plan was announced and 2020. CalPERS launched the program in 2012. Grosvenor manages $300 million.
As you can see, even though CalPERS' CIO Ted Eliopoulos is stepping down, the pension fund is busy beefing up its private equity portfolio.

No word yet on whether part of the private equity portfolio will be outsourced to BlackRock but something tells me a deal is imminent and Larry Fink is preparing for it.

Of course, the naked capitalism blog is busy criticizing CalPERS' every move, accusing the fund of issuing a false and misleading press release to try to railroad its board on a 'private equity enrichment scheme' and accusing the CIO  of five big lies on this super indirect private equity scheme.

Yves Smith loves the shock and awe approach in her blog comments. It's like she's trying to emulate Noami Klein every time she writes a post.

Alright, let me get to it. Yves is right on one point, this isn't direct private equity.  No Canadian or US pension fund is doing purely direct private equity deals on such a large scale. There have been some purely direct private equity deals in Canada but they are rare; the bulk of PE investments are still in funds and LPs co-invest with big private equity firms on some large transactions to lower overall fees or they bid on a portfolio company when the life of the fund ends.

Go back to read my comment on the Caisse going direct in private equity. I explain all this in great detail, don't have time to rehash it here. Yves Smith never bothered reading this comment carefully or else she wouldn't claim the Caisse "already does 2/3 of its private equity investing in-house and plans to go further in that direction. " (total rubbish!!!).

The important thing to remember is while there is a big push to lower fees in public and private markets, there is no US or Canadian pension fund competing with any of the large PE funds head on.

So get this notion of "direct private equity" out of your mind. It's never going to happen, ever, and it has nothing to do with the capabilities and competencies of the PE staff working at these pensions. The first phone calls on major private deals go to PE kingpins, not the heads of public pension funds.

The second thing I want to discuss is governance. Yes, it's true, this fund will have its own board but CalPERS is doing this for one simple reason Yves Smith fails to understand, there's too much politics at CalPERS limiting compensation at the fund. They need to create a separate entity with its own board to circumvent this and pay market rates for this PE fund.

I've said it before and I'll say it again, you pay people peanuts, you'll get mediocre results. If you want the Canadian pension model, you have to pay Canadian compensation or else forget it. you won't get the same results.

The important thing to remember is there is no way CalPERS can truly beef up its private equity portfolio or outsource part of it to whoever without creating this structure.

Stop reading garbage on naked capitalism. Sure, maybe CalPERS is trying too hard to spin this private equity venture and is exposing itself to some criticism but stop believing everything you read on naked capitalism. A lot of her assertions are laughable and full of it and fed to her by some CalPERS board members who have a hidden agenda.

Of course, it doesn't help that after questions raised about CalPERS CFO's background and experience, he's 'no longer with' the pension fund:
Charles Asubonten, whose background and experience came into question months after he was hired as the chief financial officer of CalPERS, is no longer with the giant pension fund, the organization acknowledged Monday.

The circumstances of Asubonten's departure from the CalPERS executive ranks are unclear. CalPERS made no announcement that he was leaving, but a spokesman acknowledged that he is "no longer with CalPERS." The spokesman said Asubonten's departure is being treated as a "personnel matter" and therefore no further information would be provided. His place will be taken on an interim basis by Marlene Timberlake D'Adamo, CalPERS' chief compliance officer. D'Adamo also served as interim CFO after the departure of Cheryl Eason in 2016.

CalPERS also declined to discuss the timing of Asubonten's departure. But at the May 15 meeting of the board's finance and administrative committee, at which he had been scheduled to give as many as six presentations, his place was taken by D'Adamo. Asubonten could not be reached Monday for comment.

Asubonten's departure should intensify questions about whether CalPERS management and its board members are up to the task of overseeing a $350-billion retirement and healthcare system serving more than 3 million present and past public employees and their families. The questions apply not only to Asubonten's qualifications, but the process that led to his appointment to a post with responsibilities requiring top-flight management skills and experience.

Treating his departure as a state secret won't quell these doubts. That's especially so given what appears to be CalPERS management's complicity in exaggerating Asubonten's work experience. CalPERS should come clean about the process.

Asubonten was named as CFO of the California Public Employees' Retirement System in September. As we reported last month, questions were raised by the financial blog about whether he had experience commensurate with the job, amid signs that his resume may have overstated his experience.

Among other issues, Asubonten claimed to have served as "managing director" of a private equity firm before joining CalPERS, an assertion CalPERS repeated in its press release announcing his appointment last year.

But that looked misleading: The "private equity firm" was a consulting firm Asubonten had founded that did no investing of its own. Rather, as Asubonten acknowledged in an interview with The Times, it consulted for investors overseas. Asubonten declined to discuss the scale of those investors. The managing director title appeared to be one he bestowed upon himself.
Let's face it, CalPERS screwed up "bigly" hiring Charles Asubonten as its CFO. This guy doesn't have the credentials to be the CFO of a $350 billion pension fund.

By the way, the CFO position is one of the most important positions for a lot of reasons and I think it's a critical position, so you need to hire the right person with the right qualifications for such an important job.

For example, Canada’s CFO of the Year Award finalist Nathalie Bernier knows this first-hand: the CFO of PSP Investments (PSP) has been leading the strategic transformation of her organization:

Take the time to read this interview with Nathalie Bernier to understand the responsibilities of a highly qualified CFO at a large pension fund.

I've seen a few qualified CFOs in my career, one of the best was Paul Buron, the former CFO of the Business Development Bank of Canada (BDC) who is now Executive Vice-President, Government Mandates and Programs Management at Investissement Québec (no, he didn't pay me to say this, I hardly know the man but was very impressed with his work ethic, leadership, and capabilities, he's as solid as they come).

Anyway, all this to say, if you're going to hire a CFO, get a top-notch CFO and pay them properly.

As far as CalPERS bringing private equity in-house, it's not what you think, it's basically a new structure to circumvent stupid compensation policies that don't allow CalPERS to pay its PE staff properly.

Capiche? Stop reading naked capitalism and start reading more Pension Pulse, I get straight to the point and I'm not going to waste your time with nonsense.

As always, if you have anything to add, email me at and I'll be glad to discuss.

Below, CalPERS CIO Ted Eliopoulos discusses the pension fund's launch of two new private equity funds, investing strategy and his departure from CalPERS. He speaks with Erik Schatzker on "Bloomberg Daybreak: Americas."

Notice how Ted explicitly states CalPERS will continue investing in PE funds but needs scale, which it will get through large co-investment opportunities through these existing relationships. It still needs to create a structure to hire qualified PE staff to quickly and thoroughly evaluate these co-investment opportunities as they arise.

And former CalPERS board member JJ Jelincic sent me the latest Performance, Compensation and Talent Management Committee and told me: "Look at minutes 40-50 about the ability to pay salaries. For context Richard Gillihan is the director of the California Department of Human Resources (the old department of personnel administration)."

I thank JJ for sharing this clip, it pretty much confirms my long-held belief that CalPERS has not kept pace with setting competitive compensation even though the board has the authority to do so.

Monday, May 21, 2018

BCI's Toxic Work Environment?

A little over a month ago, Barry Critchley of the National Post reported, 'They’ve treated people like dirt': Equity group layoffs at $135 billion BCIMC raise questions about morale:
The BC Investment Management Corp., one of the country’s largest pension managers, has laid off “about 20” of its investment professionals, a mix of analysts and portfolio managers who largely worked in equities.

The layoffs, most of which took place in February and affected approximately half of the equities group, have according to sources hurt morale at the organization, which manages $135 billion of assets.

“People are very concerned about their jobs,” said one observer.

Part of the problem was the sudden, and seemingly chaotic way in which the layoffs were carried out.

On the day of the layoffs, a source said, emails were sent advising some staff to go to one location and the rest to another, to hear the good or bad news. But some wound up in the wrong room and had to be pulled out and redirected before the news was delivered.

The decision to cut employees was made a few days after the manager’s human resources department issued a note advising assistance was available to those feeling stressed.

For some employees, stress reduction has apparently come from venting their frustration on the website Glassdoor, a job site that contains reviews of employers. “Terminations and re-orgs are now the status quo,” said a recent anonymous post.

The layoffs have left some wondering how replacements will be found given the relative lack of money management talent in Victoria.

BCIMC has stated its plan is to internalize active management on a global basis, and the investment managers needed — who would most likely have to be recruited from Calgary, Toronto or Montreal — may rethink given what’s happened.

“In a nutshell they’ve treated people like dirt,” noted the observer, adding the approach was “different” from that employed by former chief executive Doug Pearce who left in mid-2014. “Doug had a different philosophy, one that was more of a cultural fit with Victoria.”

One pension fund consultant said if such employee cuts were made by a private sector manager, the clients “would have responded and fired the manager. But in bcIMC’s case, the clients are captive.” In all, bcIMC has 31 institutional clients with almost 98 per cent of the assets being either public sector pension funds or from “government bodies.”

“It’s (essentially) part of the government, but has now added this Wall Street mentality. What’s the board doing?” asked the consultant.

The layoffs are the latest in a series of changes that kicked off almost four years back when Gordon Fyfe replaced Pearce as chief executive. Fyfe was the former chief executive of the $90 billion PSP Investments.

Over time, Fyfe has hired a number of former PSP staffers: of the nine members of its executive management team, three came from PSP, five are long-term employees and one came from a fund outside Canada.

“I think they wanted new people, a bit of a housekeeping exercise,” is how the observer described the personnel and structural changes.

The pension fund’s stated goal of becoming “an in-house asset manager that uses sophisticated investment strategies and tools,” has meant a greater allocation to private equity, mortgages, real estate, renewable resources and infrastructure. In 2016 it launched QuadReal, a real estate manager.

For whatever reason, the fund’s three-year plan of internalizing the investment management and cutting ties with external managers has progressed more slowly than expected.

Last fall, Daniel Garant, a former PSP first vice-president, came on board, an arrival that coincided with the departure of Bryan Thomson, senior vice president of public equities.

Garant is now senior vice-president public markets.

We sought comment from bcIMC on staff cuts, severance costs, morale and progress on the plan to internalize investment management.

“I’m respectfully declining your request as BCI does not publicly comment on or discuss personnel matters,” a spokesperson said.
It's Victoria Day in Canada so a lot of people are off. I was reading a Bloomberg article on how the hottest market in the world for luxury real estate is sleepy Victoria, British Columbia:
Victoria was only fifth-hottest based on average price -- up 6 percent to $1.2 million from 2016, with a high of $9 million -- behind Paris; Washington; Orange County, California; and San Diego. But the little city of afternoon teas and lush gardens soared when it came to sales volume and speed, which Christie’s weighted more heavily. The number of sales grew by 29 percent from 2016, while the average time to find a buyer was only 32 days, among the fastest turnover anywhere.
Anyway, the folks at bcIMC aren't sleeping well these days. And judging by the nasty reviews on, some are downright pissed at its CEO and senior managers (click on images):

I can go on and on but you get the picture by reading all the reviews, there are a lot of very pissed off former and current employees at bcIMC which is now called BCI.

You can dismiss these reviews as coming from a bunch of disgruntled employees but it's not that simple.

You see, while I like BCI's new website and think it's about time they revamped it, I was shocked and dismayed when I read this article and kept thinking to myself: "Didn't Gordon learn anything from his time at the Caisse and PSP?"

Importantly, if the above is true and on the day of the layoffs emails were sent advising some staff to go to one location and the rest to another, to hear the good or bad news but some wound up in the wrong room and had to be pulled out and redirected before the news was delivered, then this is grossly inhumane and a major screw-up on the organization's part (I can just see the employment lawyers having a field day: "Write down everything that happened in detail, don't leave any detail out).

Quite frankly, these type of things should never happen at BCI, PSP, the Caisse, or any other large Canadian pension fund. They shouldn't happen anywhere, period.

Sure, there are reorgizations and layoffs that take place and sometimes you need to make difficult decisions and cut staff but for god's sake, do it with compassion and empathy, show people the respect and dignity they deserve especially when your cutting their livelihood.

BCI's Board should also take note. I know Gordon told them that he has free rein to hire and fire people at will. In fact, I'm sure that was one of his stipulations for taking this job, but pay attention to the turnover rate and get some exit interviews from former employees to see how they were treated and to see if they were in fact treated fairly and justly (when I was let go from PSP, the turnover was an astonishing 36%, it was just nuts!).

By the way, this is the same advice I have for the boards at all of Canada's large pensions because every time I see this type of butchering, it brings back bad memories. You might have good reasons to lay people off but always treat them with respect and dignity.

As for Gordon, he did exactly what I was expecting him to do, focusing on private markets and hiring people from PSP. No shock there and he might have good reason to carry out some of these layoffs but the brutal way they were carried out was unjustified and a major screw-up and it sends the wrong message to BCI's employees, not to mention it kills morale.

That's something Mr. Fyfe needs to own as he travels to India and around the world and so does BCI's Board and senior managers:

One last thing, something a friend of mine who almost went to work at bcIMC when Doug Pearce was the CEO shared with me:
I think that Gordon underestimated exactly how small Victoria is.

His predecessor recruited people by telling them that they had to move to Victoria and become part of the community.

When I was approached to join bcIMC, I asked them if I could commute back and forth from Vancouver. The answer was no.

Gordon is breaking that promise (hence, the comment about a Wall Street approach). Funny, he is from Victoria so he should know this. He probably underestimates how badly it will be received.
My friend is right, I think Gordon really underestimated how badly this will be received. I certainly hope he learns from this blunder and that he finds a way to boost morale at BCI (no easy task after such a traumatic event).

Folks, this is Victoria, British Columbia, it might be a stunningly beautiful place to live but nobody in their right mind is going to take a job out there where house prices are surging to the stratosphere and live with the threat of being fired at any time.

Lastly, while I take issue with the way this reorganization was handled, I agree with those who argue that B.C.'s pension investments should stay in the hands of pros:
As finance minister in the last B.C. Liberal government, Mike de Jong relished those briefings with the credit rating agencies where he would be asked “tell us about your pensions.”

The agencies were on the lookout for unfunded liabilities, brought on by politicians granting hefty taxpayer-financed retirement benefits to public sector workers while neglecting to fund those guarantees going forward.

“Happily, that is not the story that we have,” de Jong would tell the analysts. “Our joint custody public sector pension plans are well-managed. They are well-funded and that’s important for people that want to know that the security exists around their retirement future.”

The good news story continues under the current NDP government. When New York-based S&P Global this spring reconfirmed its top-ranked Triple A credit rating for B.C., among the reasons was: “We consider the province’s pension liabilities very manageable and not a risk for B.C.’s finances.”

Here’s Toronto-based DBRS on the same subject: “The province has limited unfunded pension liabilities. As of March 31, these are projected to be $187 million, one-tenth of one per cent of gross domestic product. Unfunded pension liabilities are expected to remain low.”

The most recent edition of the audited financial statements of the province indicate that, far from falling short of obligations, three of the four public pension plans are overfunded.

For the main pension plan for provincial public servants, assets totalled 106 per cent of obligations. The plan for municipal workers weighed in at 104 per cent and the one for college and university employees topped out at 103 per cent.

Only the teachers’ pension plan lagged, with assets matching only 97 per cent of obligations, a shortfall of $372 million. As the plan, like the other three, is joint trusteed, the liability is shared equally between teachers and provincial taxpayers, needing a top up from both.

“The pension story doesn’t attract a lot of attention here in B.C.,” as de Jong noted in one of his briefings near the end of the Liberal term of office, “but it is a very positive one and one that distinguishes us from circumstances that exist in many other jurisdictions around North America.”

While basking in the glory of fiscal responsibility, he ought to have acknowledged the debt to the previous NDP government and the public sector unions. Together in the late 1990s, they engineered the current fully-funded joint trusteeships.

Ironically, the current NDP government was called to account this week over reports that the current plans are significantly invested in the fossil fuel industry.

Holdings include Kinder Morgan, developer of the Trans Mountain pipeline expansion, which the B.C. New Democrats oppose. As noted here recently, the B.C. pensions also have a stake in Cheniere Energy, the U.S.-based rival to B.C.’s hopes of developing a liquefied natural gas industry.

When Premier John Horgan was challenged about his own MLA pension and others in the public sector being partly invested in Kinder Morgan and other fossil fuel companies, he didn’t deny the optics.

“It may raise a few eyebrows,” Horgan conceded to reporters Tuesday. “Often times this looks bizarre to the public.” He also made the point that the plans are managed independently — and managed well — by professionals working for the B.C. Investment Management Corp.

BCIMC is jointly overseen by the unions and government. The unions fill a majority of seats on the seven-member board of directors, which hires the management and shapes the investment policies, so the government could not by itself bring about a change of direction.

There’s been talk of the New Democrats and unions working together to shift toward more progressive investment strategies. However the pension corporation is already active on that score.

“As we believe that companies that manage environmental, social and governance (ESG) matters perform better over the long term, we integrate responsible investing into our approach and processes across all asset classes,” writes CEO Gordon Fyfe in the covering letter to the corporation’s latest report on responsible investing.

Rather than simply divesting as some activists prefer, BCIMC prefers to seek change by engaging directly with companies via its holdings in their shares.

With Rio Tinto and Suncor Energy, BCIMC joined other investors in successfully supporting “proposals that called for additional disclosure relating to the companies’ exposure to climate change risks.” With Anglo American mining, it backed a requirement to report annually on the resiliency of its business model under different climate change scenarios for 2035 and beyond.”

More quixotic was backing a proposal that did not pass, calling on the Potash Corporation of Saskatchewan “to assess its human rights responsibilities related to sourcing phosphate rock from Western Sahara.”

The investment corporation joined others in defeating excessive compensation and bonus schemes at Canadian Pacific Railway, Crescent Point Energy and BP. “Our primary focus is on pay for performance,” to quote the responsible investing report.

BCIMC’s performance in managing $135 billion worth of assets — witness the testimonials of the auditors, the actuaries and the credit rating agencies — has made its executives and managers among the highest paid in the public sector.

All that could change if more politically-active folks in the government and the unions decided to remake the board and its investment strategies.

An activist takeover could also risk returns on investments, which is why it would be wiser to keep the job with the professionals and out of the hands of the politicians.
British Columbia's NDP government better stay out of BCI's investment decisions. It's already screwed up with the Kinder Morgan pipeline expansion and now Bill Morneau is looking at Canadian pension funds to save that deal. It might happen but the terms have to be favorable to Canada's large pensions.

Below, discover Victoria, British Columbia. My aunt and uncle are visiting from Crete and they stopped off there before heading to Seattle to see my nephew. They said they loved Vancouver and particularly loved Victoria. I'm sure it's a beautiful place to visit, not sure I'd want to work there.

Enjoy your Victoria Day and for the folks that were laid off at BCI, close the chapter, focus on your health, move away and find a job somewhere else. It's not going to be easy but that's my best advice.