CPPIB Invests in US Detention Firms?

The Guardian reports, Canada pension fund investment into US detention firm larger than reported:
A controversial investment by one of Canada’s biggest pension funds in a company which operates private prisons in the United States is larger than initially thought, recent securities filings have revealed.

The Guardian and Documented reported last month that the Canada Pension Plan Investment Board (CPPIB) – which manages $366.6bn in pension funds on behalf of some 20 million Canadian retirees – holds stock in Geo Group.

But the most recent regulatory filings show the CPPIB has added to its holdings in Geo Group by 90,000 shares since June – an increase of nearly 50% – bringing the total investment value to $6.1m. It is not known if the fund still holds the shares; the investment board did not respond to multiple requests for comment.

Facilities operated by Geo Group have been used in recent months to detain families in the United States, following Donald Trump’s “zero tolerance” crackdown on immigration by the American government.

Meanwhile, the CPPIB decreased its holdings of CoreCivic, another private prison company, by 5,900 shares, valuing the investment at $1.65m at the time of filing.

The CPPIB is one of the largest funds in the world, and although the investments in American private prisons companies represent a narrow slice of the overall fund, they have prompted an angry reaction from campaign groups and politicians.

“I’m very surprised to hear that number is significantly higher than we had previously thought,” said Emma Pullman of SumOfUs, an advocacy group that started one of two online petitions calling on the fund to divest its holdings. Between them, the two petitions have received more than 45,000 signatures.

Selling the investment would mark a significant move for the CPPIB, which prides itself in resisting external lobbying attempts.

But public outcry appears to have rattled the board. On 14 November, the board convened a meeting with activists from two separate groups, both petitioning the investment board to divest its holdings.

“I think the reason they’re looking into these options is because the writing is on the wall,” said Logan McIntosh, a campaigner with the Leadnow advocacy group, who attended the meeting. “It’s an unnecessary and shameful investment and it’s undermining the confidence of Canadians that they can manage our retirement savings responsibly.”

Every two years, the CPPIB hosts legally mandated presentations across the country to outline its investment strategy and allow the public to ask questions.

“I don’t think Canadians are interested in profiting from the abuse of humans and the caging of children,” said Darcie Lanthier, a former financial advisor who attended one such event in Charlottetown. “I know, with what little savings I have, I go out of my way to ensure my investments are doing no harm.”
As I write this comment, stocks are plunging, and it reminds me that CPPIB has bigger issues to deal with.

Anyway, I received this article last night from Sam Boskey who is part of a distribution list made up largely of radical leftists and Marxists (they're good people, I just don't share their ideology but enjoy reading their perspectives on the 'UGLY NEW WORLD' distribution list).

I forwarded the article to Mark Machin, CPPIB's CEO, and Michel Leduc, CPPIB's Senior Managing Director & Global Head of Public Affairs and Communications, and stated: "Heads up, this can snowball into something nasty" (something along those lines).

Michel was kind enough to reach me earlier today to give some proper context into all this:
  • Out of CPPIB's 26 investment programs, only 2 are on cruise control, the passive balancing (index) portfolio and the systematic quantitative portfolio which invests in stocks all over the world based on quantitative factors. The problem lies with the latter portfolio.
  • Michel told me other large US and Canadian pensions also invested in these stocks, some like CalSTRS, divested from private prisons, others didn't. CPPIB was like 20th down the list but given its size and status, it got called out in the press. 
  • He reiterated that CPPIB does not divest from stocks because of some outside interest group. "We have a mandate to maximize returns without taking undue risks."
  • However, he also stated that "perception matters to the extent it hurts the brand and reputation of the organization" so while it doesn't drive the investment process, it must be taken into consideration.
  • Also, CPPIB adheres to certain ESG factors when making an investment and "human rights is one of them" so this "crisis" represents an opportunity to address certain deficiencies in the passive and systematic quant portfolios.
  • Basically, what he means is CPPIB is exploring a way to add an important qualitative filter to all its investments to make sure certain ESG principles are being adhered to. 
  • It's important to note even though CPPIB doesn't divest, it does routinely look at its investment process and makes changes as needed like protecting the organization from brand and reputation risk and making sure it adheres to its ESG principles across all portfolios. 
  • I raised the issue of tobacco and how pensions should follow Dr. King's advice and divest from it, and he told me "it's an issue for our passive portfolio and we are carefully weighing the pros and cons of maintaining tobacco investments but again, we must respect our mandate and our process."
  • Lastly, he told me he had spoken with a large US asset manager who manages trillions (hmm, I wonder who that can be...) and he told him "for ten years, we didn't have an issue with these investments and then all of a sudden, they got flagged."
Now, by “crisis” Michel was merely borrowing from a popular saying why waste a “crisis” when you can find ways to improve. He is emphasizing the opportunity to stretch their assessment practices as a result of risks that might be more hidden in quants and indices.

"It's a loose application of a saying and we don’t consider this issue as a 'crisis'”. Michel added this: "Given the sheer scope and diversity of the portfolio, a range of groups and individuals reach out regularly on investments they don’t support. That’s entirely fair and legitimate. So, this isn’t exactly highly unusual, albeit a stronger reaction than we have seen."

In any case, this proves that a small insignificant investment can be blown way out of proportion and come back to haunt large pensions and other investors.

For CPPIB, this represents an opportunity to dynamically review their investment process to be able to flag questionable investments ahead of time, before it becomes a media circus and blown way out of proportion. In other words, it's good this happened.

Believe it or not, the folks at CPPIB aren't into violating human rights and abusing children at US detention centers but they have a job to do, a mandate to fulfill and a process to respect. There is a review going on to improve the process, once completed, they will make a public comment.

Have some faith in the folks managing CPPIB, they're extremely competent and aware of the situation and want to ensure it never happens again but they need to respect their process and their mandate.

I thank Michel Leduc for taking the time to speak with me.

Below, as the Dow plunges more than 750 points, Mark Newton of Newton Advisors and Michael Bapis of Vios Advisors discuss the S&P 500 nearing a death cross.

Note, the stock market is closed Wednesday to respect the national day of mourning for President George H. W. Bush's funeral.