Pension360

A municipal pension fund in Michigan is suing Boston-based broker LPL Financial for allegedly misleading investors during a share buyback.

The Charter Township of Clinton Police and Fire Retirement System is seeking class-action status for its suit.

The alleged scheme, says the pension fund, allowed one of the broker’s largest shareholders to sell its LPL shares at an inflated price.

More details from the Wall Street Journal:

A Michigan pension fund has filed a lawsuit seeking class-action status against the Boston-based brokerage firm, saying it allegedly misled investors to inflate its stock price amid a $250 million share buyback plan that mostly benefited one institutional investor, according to the complaint filed in the U.S. District Court in the Southern District of California.

The Charter Township of Clinton Police and Fire Retirement System, which bought 4,000 shares of LPL earlier this year, says in the suit that LPL Chief Executive Mark Casady and Chief Financial Officer Matthew Audette conducted a “fraudulent scheme to allow” private-equity firm TPG to unload a lot of its LPL shares at an “artificially inflated price.”

[…]

LPL said in November that it would use $500 million from a debt refinancing to repurchase shares.

A month later, on Dec. 8, Messrs. Casady and Audette spoke at a Goldman Sachs Group Inc. conference and allegedly “made false and misleading statements” regarding LPL’s financial fourth-quarter financial performance, according to the complaint. Among the statements, LPL’s executives described its earnings stream as “quite steady” and said it had been executing its business plans well in the final months of 2015, the complaint says. Besides that, executives said commission revenue would be “more of the same,” compared with the third quarter, the complaint adds.

LPL shares rose the day of the conference, reaching $45.06 a share. Then, two days later, LPL followed through on half of its buyback plan, spending $250 million. Three-quarters of those funds were used to purchase 4.3 million shares of LPL common stock from TPG at $43.27, giving the buyout firm a $187 million profit, the complaint says.

Two months later, on Feb. 11, LPL disclosed fourth-quarter results that were below analyst expectations, causing its shares to fall to $16.50 a day later, erasing a third of their value in a single day. The company’s fourth-quarter profit fell roughly 45% to $48.5 million from the year-earlier period, while revenue dropped 8% to $1.02 billion.

Neither party commented on the matter.

 

Photo by Truthout.org via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Benefits Canada reports, AIMCo returns 9.1% in 2015:

Alberta Investment Management Corporation (AIMCo) has reported a 9.1% rate of return on its total assets under management for the year ending December 31, 2015.

The pension fund earned more than $1.5 billion of active value-add return above benchmark and overall investment income of $7.5 billion on total assets under management of $90.2 billion.

“I am very pleased with the terrific year of performance, especially against a backdrop of change and extreme volatility across the markets,” said Kevin Uebelein, chief executive officer. “AIMCo’s investment teams remained disciplined and focused on the long term, taking well-measured active risk positions, in-line with our investment strategies and our clients’ established needs.

“That steady hand approach, and the support of the entire organization, allowed us to identify, and act upon, value-generating opportunities across all major asset classes. This result is further evidence that the ‘Canadian Model’ of public asset management is one that very well serves the needs of the public.

“During these times of intense challenge for Alberta, it is especially gratifying to be able to deliver more than $1.5 billion of over-performance against our benchmark returns, which represents a best-ever performance figure for AIMCo.”

Detailed performance information will be available in AIMCo’s annual report to be released in June 2016.

Matt Scuffham of Reuters also reports, Canada’s AIMCo records 9.1 percent rate of return in 2015:

Canada’s Alberta Investment Management Corp (AIMCo) said it performed better in 2015 than in any year since its inception in 2008, with investments in real estate and infrastructure outperforming benchmarks.

AIMCo achieved an overall rate of return of 9.1 percent and a 10.1 percent rate after stripping out government and specialty fund clients for managing short and medium-term fixed income assets and for liquidity management.

AIMCo, which manages pension and government funds for the oil-rich province of Alberta, said overall investment income was C$7.5 billion ($5.75 billion) from total assets under management of C$90.2 billion. The performance exceeded its investment benchmark by over C$1.5 billion, it said.

AIMCo said investment teams in public equities, infrastructure, private equity and real estate all significantly outperformed their market benchmarks.

Like other Canadian pension funds, AIMCo has invested in real estate and infrastructure as an alternative to low-yielding government bonds.

“This result is further evidence that the ‘Canadian model’ of public asset management is one that very well serves the needs of the public,” said Chief Executive Officer Kevin Uebelein.

AIMCo put out a press release on its results which you can read here. In its press release, AIMCo emphasizes the 10.1% return for the Balanced Fund, which is more representative when comparing it to its large Canadian peers, and it states the following:

AIMCo’s strong results in 2015 were the outcome of contributions from across the organization. Investment teams in Public Equities, Infrastructure, Private Equity and Real Estate all significantly outperformed their market benchmarks, while Money Market & Fixed Income, Mortgages and Private Debt & Loan performed equally well, providing stable value-add through difficult market conditions.

I had a chance to discuss these results with Dénes Németh, Director, Corporate Communication at AIMCo. Unfortunately, Kevin Uebelein, AIMCo’s CEO, wasn’t available but I realized that it wouldn’t have been a fruitful discussion because the a detailed discussion of these results would require me to analyze the details from the Annual Report which only comes out in June.

I like the fact that AIMCo reports its calendar year and fiscal aggregate numbers. This makes it easier to compare its performance to its large Canadian peers.

But I find it unacceptable that AIMCo and a few other large Canadian pensions make their annual report public after releasing results. The Caisse and OMERS do this and it drives me crazy. At least the Caisse publishes a lot more detail on its performance when it releases it in February.

To be fair to these organizations, there are all sorts of reasons as to why they can’t make their annual reports available at the time of reporting their results. Leo de Bever, AIMCo’s former CEO, told me: “The fiscal release is constrained by provincial reporting issues: AIMCo ultimately consolidates in part with the provincial accounts, and we could not release before they do.”

So what do I think of AIMCo’s 2015 results? They are great. AIMCo handily beat the 5.4% average return of other large Canadian pension funds which defied market volatility last year and it even performed better than its peers like OMERS, HOOPP and the Caisse (AIMCo’s Balanced Fund returned 10.1% in 2015 vs the Caisse which returned 9.1%).

While I wasn’t able to get details of individual portfolios, Dénes Németh did tell me that AIMCo’s Balanced Fund gained 10.1% vs 8% for its benchmark in 2015 and over the last four years, it gained 11.8% vs 10.6% for its benchmark. This would explain the $1.5 billion in active value-add return above benchmark last year.

It’s also impressive that this performance was generated in Public Equities and Private Markets like Real Estate, Private Equity and Infrastructure. I commend both the Caisse and AIMCo for generating active value-add in Public Equities which is one reason why they both outperformed OMERS and HOOPP.

Of course, being an astute pension analyst, I asked Dénes two simple questions: “Does AIMCo hedge currency risk and what is the weighting of private market assets in its portfolio?”(see my coverage of HOOPP’s 2015 results to understand why I asked these questions).

Dénes replied:

“With respect to the questions below, I prefer not to respond as doing so would only provide insight toward one element of many that contribute to the successful outcomes achieved by our investment teams in 2015. My concern is that without the full story, which as I have explained will come in June, your readers may put more weight on these single factors than the overall effort that led to the strong results. I hope you will understand.”

Of course I understand and while it’s fair to point this out, it’s equally fair for me to ask these questions as a large part of AIMCo’s outperformance in 2015 is explained by these two factors.

In fact, I downloaded AIMCo’s 2014 Annual Report where I was able to get answers to all these questions and a lot more. If you want to get details on its investments and benchmarks governing every investment portfolio, take the time to read AIMCo’s 2014 Annual Report.

For example, here are the benchmarks governing each investment portfolio (click on image from page 33 of the 2014 Annual Report):

I’m not going to discuss the merits of each benchmark but for the most part, they’re excellent benchmarks that properly cover the risks of each portfolio (we can debate whether they should add a liquidity and leverage premium on the benchmark for PE and whether this benchmark has too much beta in it but benchmarks for private markets aren’t simple).

Now, to answer my question, roughly 25% of AIMCo’s assets were in Private Markets as of December 31st 2014 and I expect that figure stayed the same or marginally increased in 2015. Also, there is a note that states “For balanced funds, notional exposures and Client-directed currency derivatives are not included in asset class calculations.”

In fact, Leo de Bever shared this with me on AIMCo’s currency hedging policy:

“This has been a big debate in the pension industry. Some hedge, some don’t, some go 50-50 as a measure of ignorance. AIMCo tended to hedge fixed income because it was a US substitute for Canadian fixed income, but most listed equities were unhedged where FX markets were liquid to make that efficient.”

So, private market weights and currency gains had a material impact on overall performance in 2015. When you add to this outperformance in Public Equities which are unhedged, it was a great year for AIMCo.

Unfortunately,  I cannot share more specifics with you until AIMCO’s 2015 Annual Report is released in June. Just go to the website and you will find it here (AIMCO really needs to revamp that annoying flash website and make it cleaner and easier to find information and download PDF and HTML information).

As far as compensation, once again, I cannot provide you with details until the 2015 Annual Report is available but AIMCo pays its top brass in line with what other large Canadian pensions pay (click on image from page 69 of AIMCO’s 2014 Annual Report):

AIMCo’s CEO Kevin Uebelein just started working last year so I expect to see his compensation increase and Dale MacMaster assumed the role of CIO and is doing an outstanding job, so I expect his compensation to increase too.

Going forward, I also expect AIMCo is going to have a tough time with its Real Estate holdings in Alberta and this was expressed to me in a lunch meeting I had with Kevin Uebelein back in November (read some of those details here).

I also asked Dénes Németh about the London City Airport deal which AIMCo took part in with Ontario Teachers, OMERS and Kuwait’s sovereign wealth fund but he told me they are bound by the Consortium’s confidentiality clause.

It’s too bad because I questioned that deal, stating the premium they paid was outrageous, and would love if Kevin Uebelein, Michael Latimer or Ron Mock can share more on why this is such a great asset at that valuation and more importantly, what is their long-term strategic plan for this asset?

Of course, one senior Canadian pension fund manager who didn’t bid on this asset told me: “You can’t always look at infrastructure valuations as I’ve seen assets that look cheap and turn out to be terrible investments and others that look expensive and turn out to be great investments. It really all depends on their long-term strategic plan for this asset.” Ok, fair enough, let’s hope they know what they’re doing with this London airport.

 

Photo by thinkpanama via Flickr CC License

The Council of Institutional Investors, which represents the largest pension funds in the U.S., is urging companies to halt a particular IPO structure that gives more control to insiders and less power to investors.

From Reuters:

Members of the Council of Institutional Investors voted to adopt a new policy that all investors in initial public offerings have equal voting rights among their shares, an official of the group said. They are concerned that dual-class share structures with unequal rights make management less accountable.

When executives use dual-class structures, “Basically you have insulated yourself from the broader market,” said Ken Bertsch, executive director of the influential trade association.

[…]

Bertsch and others said the group is putting a new focus on stopping dual-class and multiclass structures in IPOs now after a steady stream of them lately including e-commerce company Alibaba Group Holding Ltd (BABA.N) deal-provider Groupon Inc (GRPN.O) and social network LinkedIn Corp (LNKD.N).

Out of 174 U.S. IPOs in 2015, 27 valued collectively at $12.6 billion used dual-class structures, according to Dealogic. In 2014, 36 IPOs used the structure, with a total value of $9.9 billion, out of a total of 292 U.S. IPOs.

Corporate leaders have defended the structures at bigger companies including Viacom Inc (VIAB.O) and Google parent Alphabet Inc (GOOGL.O). They argued the extra voting power given to founders and top executives helps protect against pressure for short-term returns, especially as activist hedge funds gain clout.

Despite counting many of the largest investors in the world among its members, the Council has been unable to make progress in this area in the past.

 

Photo by jypsygen via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Chris Bryant of Bloomberg reports, Draghi’s Pension Poison:

Mario Draghi’s latest batch of measures to boost the euro-area economy comes with a sting in the tail for companies and anyone hoping to retire comfortably one day.

Extending quantitative easing to include non-bank corporate bonds is poised to make life even tougher for company pension plans. Record-low interest rates had already depressed bond yields, making it harder for companies to finance retirement promises made to employees. The ECB’s move is likely to send company debt prices up and yields even lower, worsening their struggle (click on image).

It’s a huge problem. The The first stress test of European defined-benefit and hybrid pension plans in January found a combined 428 billion-euro ($484 billion) funding shortfall euros across 17 countries. To give but one example: Lufthansa’s 6.6 billion-euro pension-plan deficit is roughly the same as its market capitalization.

Rising prices boost the value of the assets pension plans use to fund retirement obligations — a good thing. But those gains have been swamped in recent years by problems on the liability side.

Accountancy rules require companies to assess projected pension liabilities using a discount rate based on the prevailing yield of investment-grade corporate bonds. The calculations determine how much companies must set aside now to fund future obligations.

Falling bond yields result in a lower discount rate, which in turn increases the costs of meeting those obligations. In short: pension deficits get bigger.

Paul Watters, credit analyst at Standard & Poor’s, estimates that a 1 percentage-point decline in the discount rate tends to increase pension obligations by about 16 percent at large companies with the most-exposed pension plans.

The ECB’s timing is unfortunate as its intervention followed a period of relative respite for pension plan managers last year, when discount rates rose and deficits therefore narrowed somewhat (click on image).

Total pension obligations for companies in Germany’s Dax had increased 24 percent to 372 billion euros in 2014 but declined by about 10 billion euros in 2015, according to Mercer, a consultancy. The funding ratio (of pension assets to obligations) improved from 61 percent to 65 percent last year.

This may all sound a bit dull, but it has important consequences for companies, investors, the economy, and of course, employees.

If companies divert capital to plug a hole in the pension fund, they have less cash to fund capital investments. A big pension deficit hanging over a company means employees are also less likely to be able to win pay increases. Widening pension deficits could therefore create a headwind to QE’s effectiveness.

Credit-rating companies pay attention to pension deficits, and bigger shortfalls might prompt them to raise a flag that could feed into higher borrowing costs — another drain on cash. Ballooning gaps also make equity investors nervous because dividend payments can come under pressure. These can counteract QE’s beneficial effect of cutting bond yields and boosting equities.

What can be done, besides closing defined benefit plans to new entrants? Companies could move liabilities to an insurer via a buyout, but this would cost it money, reducing reported profit.

Regulators could create a bit of breathing space for companies by allowing them to take less rigid approach to setting pension discount rates. Where permitted, corporate pension plans should also consider diversifying further into riskier assets like property and infrastructure — that would help in particular in Germany, where pension funds are often weighted heavily towards low-yielding bonds.

Yet until interest rates rise materially — which seems very unlikely — the fundamental problem isn’t going to go away.

It’s true that corporate pension plans would also be in serious trouble if the ECB had refused to act, and that created a deflationary spiral and pushed the continent back into recession.

Nevertheless, investors cheering Draghi’s latest injection of adrenaline into the region’s economy need to be alert to its side effects.

This is a great article which highlights the pros and cons of the ECB’s quantitative easing on Europe’s corporate defined-benefit plans.

But make no mistake, in order to avert his worst nightmare, Mario Draghi has chosen his pension poison, and it’s one that will decimate corporate and state defined-benefit plans. This is why I recently argued it’s checkmate for Europe’s pensions.

Of course, this is all part of a much bigger problem, the $78 trillion global pension disaster. That too isn’t going away and its implications will be with us for a very long time.

Interestingly, when I discuss solutions to the global pension crisis, I refer to common sense proposals like raising the retirement age, introducing better governance at pension plans, implementing a shared-risk model which means stakeholders share the risk of the plan.

That last one doesn’t sit well with public sector unions because they typically don’t want to share any risk of the plan but the reality is that in an ultra low rate or negative rate environment, stakeholders will need to prepare for lower returns ahead, especially if a long bout of deflation sets in. This will decimate pensions.

And herein lies the danger. Central banks might be the only game in town but thus far their policies have largely benefited elite hedge funds, private equity funds and big Wall Street banks. Their attempt to reflate economies via the wealth effect has fallen short and the reason is simple: When wealth is increasingly concentrated in fewer and fewer hands, all that liquidity benefits fewer and fewer people.

This is why I continuously cite six structural factors that virtually ensure global deflation:

1. The global jobs crisis
2. Aging demographics
3. The global pension crisis
4. Rising inequality
5. High and unsustainable debt
6. Technological shifts

There is another potential factor that worries me, one that hit close to home this morning as I watched reports of terrorists attacking the airport and a subway in Brussels. Terror in Brussels can easily spread throughout Europe and even North America and my fear is that governments throughout the world are underestimating the poison called ISIL and its ability to wreak havoc on our lives.

I’ve been to Brussels where my mother and stepfather lived for eight years (they are now living in London and their friends in Brussels are fine). It’s a beautiful, quaint city full of diplomats and I felt extremely safe there. Watching the horror unfold this morning reminded me that terrorists disrupt lives by ripping apart what we hold sacred, namely, living in peace and harmony while cherishing the diversity of our pluralistic societies.

My fear now is that another poison will take over Europe, one of extreme nationalism and intolerance which plagued the continent in the past. The same thing will happen in the United States, especially under a President Donald Trump who openly discusses increasing protectionism and curbing immigration.

Don’t get me wrong, the world is a dangerous place and there is a serious problem with radical Muslims who spread their poison by perverting and distorting their religion. But if we react to terrorism with policies that target groups or countries, we’re going to be playing right into the hands of terrorists and right-wing extremists who will use this as fuel to fight their twisted jihadist war or to bring back the dark side of nationalism. That is one poison Europe and the rest of the world can do without.

In a move akin to paying a mortgage with a credit card, Chicago on Monday borrowed $220 million to make its required 2016 payments to its pension systems.

However, a bill currently sits in the stalemated legislature that would reduce Chicago’s 2016 short-term pension costs significantly by stretching out payments over time.

If that bill is passed – as it is eventually expected to be – Chicago will return the $220 million to its line of credit.

More from the Chicago Tribune:

A potential year-end budget shortfall has forced Mayor Rahm Emanuel’s administration to borrow $220 million in yet another sign of the city’s precarious pension funding status.

The city drew the money down from its $900 million line of short-term credit, which is akin to putting the tab on a credit card. The loan carries an interest rate of about 3 percent.

The money is not due to police and fire pension funds until the end of the year. But the city had to borrow the money to meet a March 1 deadline for having the cash in its treasury, Budget Director Alexandra Holt said. “State law requires that we deposit the money with the treasurer to demonstrate we have the money available if it’s needed,” she said.

[…]

Emanuel’s budget still depended on Gov. Bruce Rauner to sign a bill that would stretch out the payments and reduce this year’s cost by $219 million.

Although the state House and Senate, both controlled by Democrats, approved the bill, they have not sent it to the governor for fear he’ll veto it if they don’t sign on to his pro-business, union-weakening agenda.

The state Supreme Court on Thursday will rule on the legality of the city’s 2014 pension reform law.

 

Photo by Pete Souza via Flickr CC License

The Illinois Supreme Court on Thursday will announce its judgment on the legality of Chicago’s 2014 pension reform law.

A lower court declared the law – which mandated higher contributions for current employees and reduced cost-of-living adjustments for retirees of two city pension systems – unconstitutional.

More on the upcoming ruling, from Reuters:

The Illinois Supreme Court on Thursday will release its ruling on the constitutionality of a 2014 state law aimed at boosting funding for two of Chicago’s pension funds, according to a court spokeswoman.

In oral arguments before the court in November, Chicago asserted the law affecting its municipal and laborers’ retirement systems actually benefited workers and retirees by taking steps to avoid insolvency for the funds.

The state law required the city and affected workers to increase their pension contributions and replaced an automatic 3 percent annual cost-of-living increase for retirees with one tied to inflation. The increase would be skipped in some years.

Without reforms, Chicago warned that the two funds would run out of money within 10 to 13 years.

City unions and retirees that filed challenges to the 2014 law contended Chicago merely wished to avoid paying for benefits promised to its workers, in violation of the state constitution’s pension protection clause.

Municipal bond investors, for their part, had declared the case a loss for Chicago months ago.

 

Photo by bitsorf via Flickr CC License

Japan’s Government Pension Investment Fund, the world’s largest pension fund, named a new president this week.

He takes the helm of a pension fund undergoing rapid change and facing many challenges.

From Bloomberg:

The world’s biggest pension fund named former agricultural banker Norihiro Takahashi as president, bringing in a new manager to take the reins in a Japanese election year marked by volatile stock trading.

Takahashi, 58, will replace a retiring Takahiro Mitani. He faces a tough introduction to the job as president of the $1.2 trillion Government Pension Investment Fund. Opposition politicians claim that the fund has invested too much in stocks after doubling its allocation of equities in 2014 with the blessing of Prime Minister Shinzo Abe.

That criticism is only likely to increase in the run-up to elections which are likely this year, after a volatile start to 2016 whipsawed global equity markets and the Nikkei 225 Stock Average had its worst start to a year on record. Japanese stocks have recovered about half their losses after tumbling more than 20 percent through Feb. 12.

“Takahashi is going to have to be very mentally strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “Even if he gets pressure from above him, I hope he’ll do what’s right for pensioners, not politicians.”

He’ll begin the job on April 1.

 

Photo by Ville Miettinen via Flickr CC License

Greece and its lenders – including inspectors from the International Monetary Fund and the European Central Bank – made progress this week on the country’s pension reforms, according to a report from Reuters.

The country’s next round of bailout money is contingent on these reforms.

Greece has resisted steep pension cuts, and has struggled to meet inspectors’ demands as lenders disapproved of portions of the country’s proposed pension reforms.

More from Reuters:

Inspectors from the European Commision, the European Central Bank and the International Monetary Fund assessing Greece’s progress on reforms left Athens on Sunday, taking a break for the Easter holiday in western Christianity.

“The mission made important progress on key aspects of the pension reform. Work is ongoing and will continue over the Easter break. The mission chiefs will return to Athens on April 2 to resume the discussions with a view to conclude them as soon as possible,” the spokesperson said.

Greek Prime Minister Alexis Tsipras wants to wrap up the reform review quickly to clear the way for talks on debt relief, help restore confidence in the country’s economy and persuade the Greek people that their sacrifices over six years of austerity are paying off.

[…]

The government, which has a parliamentary majority of just three seats, has pledged to trim its pension budget by 1 percent of GDP this year. But it wants to avoid cutting pensions for the 12th time since 2010 to plug the estimated fiscal hole.

Greek government officials said the IMF opposed key pension proposals, such as hiking social security contributions, during the latest round of talks and it wants to lower a tax-exempt threshold for low-income earners.

See more Greece coverage here.

 

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Flag-map_of_Greece.svg#/media/File:Flag-map_of_Greece.svg