Pension360

Amidst market turmoil, China decided this summer to begin letting its pension funds invest in domestic stocks for the first time.

Under the new rules, released this week, the country’s pension funds will be able to allocate up to 30 percent of assets – $97 billion, collectively – in domestic equities.

From the Guardian:

China has cleared the path for local authority pension funds to invest in the stock market for the first time, potentially channelling hundreds of billions of yuan into the country’s struggling Shanghai exchange. After a week of turbulence that sent world stock markets spiralling to their worst weekly loss for the year, Xinhua, the official news agency, reported on Sunday that under the new rules, the fund will be allowed to invest up to 30% of its net assets in domestically listed shares.

The move, which is likely to be seen as a brazen attempt to inject pension cash into the market to shore up prices and restore investor confidence, comes ahead of several reports that are likely to show the world’s major economies struggling to recover as China’s main industries slowdown.

[…]

Previously, Chinese pension funds could only invest in bank deposits and treasuries. Together the funds have assets of more than 2tn yuan ($322bn) that can be invested, meaning about 600bn yuan ($97bn) could theoretically go into the stock market, state media has estimated.

According to the new rules, pension funds can also invest in convertible bonds, money-market instruments, asset-backed securities, index futures and bond futures in China, as well as the country’s major infrastructure projects.

China’s benchmark Shanghai Composite index fell 8.5% on Monday morning.

 

Photo by “Asia Globe NASA”. Licensed under Public domain via Wikimedia Commons

A recent settlement regarding pension changes in San Jose – which you can read about here – is a good example of the legal obstacles facing governments trying to offload pension liabilities, according to a new Fitch report.

More from Fitch:

The city’s [recent] agreement with police and firefighter unions would restrict most pension reforms to new hires, leaving benefits for existing employees and retirees largely untouched. San Jose voters authorized broad changes to public pensions under Measure B in 2012, but reforms have been stalled by legal challenges from the outset.

Many observers had expected the litigation to provide an opportunity for legal clarification of the so-called California Rule, which provides that pension benefits are a vested contractual right and cannot be impaired for existing public employees and retirees. Lower courts had generally supported this position in earlier Measure B litigation, but such cases had yet to come before the Supreme Court of California.

Local government pension reform in California could see increased attention under a voter initiative targeting the November 2016 general election. Signature gathering recently began for the Voter Empowerment Act of 2016, which would amend the state’s constitution to permit local voter initiatives to address public employee compensation and retirement benefits. The measure was sponsored by San Jose’s former mayor, among other proponents, and appears designed to overturn the California Rule.

The likelihood of approval for the new initiative is uncertain, particularly given anticipated strong opposition from public employee unions. However, ongoing legal battles over pension reform can be expected regardless of the initiative’s outcome and will continue to challenge efforts to reduce pension liabilities in California and other states.

Click here for a detailed look into San Jose’s recent settlement.

 

Photo by Joe Gratz via Flickr CC License

United States Steel Corp. announced this weekend that it will be freezing its defined benefit pension plan at the end of 2015, according to the Wall Street Journal.

People won’t lose benefits already accumulated; but starting in January 2016, all worker contributions will go towards a 401(k) plan.

More from the Wall Street Journal:

The company announced in a regulatory filing that employees in the plans will stop receiving benefits under the plans, which guaranteed payouts to retirees, and will be moved to a defined contribution 401(k) plan. Under those plans, retirees are responsible for their own investment decisions.

U.S. Steel’s pension had a pension obligation of $7.4 billion at the end of last year, down from $10.3 billion at the end of 2013. The plan was underfunded by $966 million, meaning the value of the assets in the plans was lower than the obligation.

“We continue to face increasingly significant headwinds and pressures,” said a U.S. Steel spokeswoman via e-mail, adding, “it requires us to examine all aspects of our company.”

[…]

In 1979, 38% of U.S. private-sector workers were covered by defined-benefit plans. By 2011, that figure fell to 14%, according to the Employment Benefit Research Institute. By contrast, the percentage enrolled in defined-contribution plans more than doubled to 42%.

The company was the 15^th largest steel producer in the world in 2014.

 

Photo by Sarath Kuchi via Flickr CC License

In the past, we’ve briefly covered “pension advance” firms – firms that make very high-interest loans against retirees’ pensions, similar to a payday loan model.

The business model itself is not illegal, except in Missouri.

But federal and state regulators this week announced they’ll be taking two such firms to federal court for deceptive business practices.

More from the NJ Herald:

Regulators say that the companies, Pension Funding LLC and Pension Income LLC, used deceptive marketing tactics to target the pensions of seniors and military personnel. The U.S. Consumer Financial Protection Bureau and New York state’s Department of Financial Services filed the lawsuit against the companies in federal court in Santa Ana, California.

They say the companies tricked consumers into borrowing against their pensions by portraying the deals as sales instead of loans, and failing to disclose high interest rates and fees.

The business of so-called pension advance loans, which grew during the recession, has been under scrutiny by regulators in recent years. Targeting seniors hit hard during the economic downturn, the schemes can drive retirees deeper into debt, regulators say.

“We are working to put a stop to the illegal practices these companies are using to sell their bogus product to military veterans and other pensioners,” CFPB Director Richard Cordray said in a statement.

[…]

The suit alleges that the companies violated the 2010 law overhauling financial regulation after the financial crisis by misrepresenting the products as sales rather than loans, and failing to disclose high rates and fees for the loans. In some cases, the promoters implied to consumers that they could face criminal prosecution if they stopped making payments, the suit said.

Read more about pension advances here.

 

Photo by http://401kcalculator.org via Flickr CC License

Here’s an interesting panel discussion that took place during the Milken Institute’s 2015 Global Conference.

The topic was “patient” capital – and how patient pension funds should be with their investment approach.

Panelists include:

* Jagdeep Singh Bachher – Chief Investment Officer at the University of California

* Janet Cowell – Treasurer of North Carolina and sole fiduciary for the North Carolina Retirement Systems

* Britt Harris – Chief Investment Officer of the Teachers Retirement System of Texas

From the video description:

While pension funds are still the leading source of “patient” capital, often deployed in financing infrastructure and building long-term business value, the amount they provide has declined markedly over the years.

Persistent low rates of return across conservative asset classes are prompting investors to stretch for return and yield by increasing their allocations to equities and alternative investments such as hedge funds, private equity and real estate. At the same time, the rise of short-term benchmarking, along with regulatory change, has led funds to shrink their time horizons.

Do funds have an ethical obligation to think long-term? Can pensions do that while meeting the demographically driven demand for payouts from their members? How can CIOs manage their portfolios and meet plan obligations in the current market environment? What changes are they weighing to their governance, compliance and asset allocation strategies as they reassess risk/return strategies?

 

Video source: Milken Institute

Photo by  Paul Becker via Flickr CC License

New Jersey’s Supreme Court will soon decide whether the state acted legally when it froze retiree cost-of-living adjustments in 2011.

If the high court restores COLAs, the state could suffer its tenth credit downgrade in five years, warned Moody’s this week.

More from NorthJersey.com:

Analysts at Moody’s issued a rare warning on Monday. New Jersey’s A2 credit rating, one of the lowest among the 50 states, could go down again if Christie received “an unfavorable court decision in the pension litigation regarding COLAs,” Moody’s said.

[…]

Lawyers involved in the new round of pension litigation say that whatever the Supreme Court rules, it will have a dramatic effect on the state’s finances. When Christie signed the law freezing pension benefits in 2011, the move was expected to save tens of billions of dollars in pension costs over two to three decades.

But Fitch also said this week that a separate Supreme Court ruling – this summer’s decision that Christie wasn’t beholden to a 2011 reform law’s pension contribution timeline – didn’t swing the needle all that much, because it helped the state’s short-term budget but hurts the pension system long-term.

Reported by NorthJersey.com:

On Tuesday, another agency, Fitch Ratings, said that court ruling would ease some of the state’s budget woes in the short term even as it left the pension system “more exposed to future under-funding.”

Fitch, in a review of school construction borrowing, did not upgrade New Jersey’s bonds from their “A” rating, but it did revise the state’s financial outlook from negative to stable, noting several improvements.

The three major ratings agencies have collectively downgraded New Jersey nine times since 2011.

 

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Some thought an appeal of a court ruling blocking a key part of a San Jose pension reform could lead to a high court review of the “California rule,” an issue in an initiative ballot summary issued last week by Attorney General Kamala Harris.

But dropping an appeal of the superior court ruling is part of a settlement of union suits against the voter-approved pension reform that, under a San Jose city council agreement last week with police, could soon be implemented by court action.

The “California rule” is a series of state court decisions widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

Because of the rule, most cost-cutting pension reforms are limited to new hires, which can take decades to get significant savings. The rule prevents what the watchdog Little Hoover Commission and others say is needed to get immediate savings.

Namely, cut the pensions that current workers will earn in the future, while protecting the pension amounts they have already earned. It’s allowed in private-sector pensions and all but a dozen states that have something like the “California rule.”

A pension reform approved by 69 percent of San Jose voters in 2012, Measure B, used an option to cut pensions current workers earn in the future: contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension.

While approving other parts of the measure, Santa Clara County Superior Court Judge Patricia Lucas ruled in December 2013, citing previous “California rule” court decisions, that the option violated the vested rights of current workers.

Former San Jose Mayor Chuck Reed, the Measure B lead author, and others have said the “California rule” decisions made in different circumstances in the distant past, one in 1947, could have a different outcome if reviewed by a high court now.

For example, a legal scholar, Amy Monahan, argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan said.

In addition, under the “California rule” a pension increase on the job becomes a vested right that can‘t be cut, even if it’s retroactive (such as SB 400 in 1999), not paid for with employer-employee contributions, and creates an immediate pension debt.

And the “California rule” decisions were made by judges who were in the state pension system. As Orange County unsuccessfully tried to overturn a retroactive increase for deputy sheriffs in 2011, an attorney for the deputies noted the conflict of interest.

“Miriam A. Vogel, a retired Court of Appeal justice, clearly told her former colleagues that the court’s decision would affect every pension in the state of California: “(I)t would affect yours, it would affect mine,” former Orange County Supervisor John Moorlach (now a state senator) wrote in the Orange County Register.

Litigation of Measure B was an issue in the San Jose mayor race last fall. The winner, Sam Liccardo, a Reed ally, said “a mayor who will fully litigate — and implement — Measure B reforms” is needed to solve deep city budget problems.

The loser, Dave Cortese, backed by public employee unions, advocated settling the Measure B lawsuits, warning that pension cuts were causing the city to lose police officers, endangering public safety.

“Public unions assert that pensions are inviolable, but California’s high court has never decided whether future benefits are protected under the state constitution,” a Wall Street Journal editorial said after Liccardo’s victory.

A need to rebuild a police department, which dropped from 1,400 members in 2009 to about 960 last month, was said to be a main driver of the police and firefighter settlement negotiated by new city staff and new union leaders.

Firefighters approved the settlement last month. Police said they would not ratify an 8 percent pay raise unless the city agreed to have a court invalidate Measure B and replace it with the settlement.

The city wanted to wait until the next scheduled election, November 2016, for voter approval. Last Friday the city council agreed to ask the court to make the change. The police union was voting on the package over the weekend.

Liccardo and Reed said in an op-ed article in the San Mercury News on Aug. 7 that the settlement achieves their goals of reducing “unsustainable” retirement benefits, not adding to $3 billion in unfunded retirement debt, and rebuilding the police force.

An independent actuary expects the settlement to cut costs $1.7 billion over the next three decades compared to police and fire benefits in 2012, the two men said. More savings may come from negotiations with nine other city unions.

Lower pensions for new hires, competitive with other cities, are expected to save $1.15 billion over 30 years, cuts in retiree health care $244 million, and the elimination of a “bonus” pension check $270 million.

“The agreement would not include savings contemplated by Measure B’s mandate for employees to pay up to an additional 16 percent of their salaries for pensions,” Liccardo and Reed said in the article.

“We would need to chase those savings down a long and perilous road, however, spending millions in litigation over several years to appeal to the California Supreme Court. If we failed, we’d lose the $1.7 billion in savings achieved by this settlement, not to mention many more longtime employees who would be likely to resign.”

The city reportedly has spent $4 million on Measure B legal fees. The police union president, Paul Kelly, told reporters last week he would have taken the settlement deal four years ago before Measure B.

In the August issue of the San Jose Police Officers Association publication, Vanguard, Kelly said the union had proposed pension reforms saving tens of millions: “Reed preferred to roll the dice, putting forward the disastrous Measure B. He lost.”

Last week Attorney General Kamala Harris issued a ballot summary of a statewide pension initiative proposed by a bipartisan group led by Reed, a Democrat, and former San Diego city councilman Carl DeMaio, a Republican.

The “Voter Empowerment Act of 2016” would require voter approval of pensions for new state and local government employees, government paying more than half the cost of new hire retirement benefits, and any pension increase for current workers.

The first sentence of the Harris summary of the initiative: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed.”

Reed and DeMaio say the initiative would not overturn the “California rule” and allow cuts in the pensions current workers earn in the future. Harris agrees with union attorneys who say that door is opened by giving voters the right to set pay and benefits.

Why is overturning the “California rule” an issue? For one thing, hard-hitting opposition television ads could feature police, firefighters and others held in high public regard warning that their promised pensions could be cut.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com

Photo by Joe Gratz 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.

Camilla Knudsen of Reuters reports, Norway’s $870 bln fund sinks to first loss in three years:

Norway’s $870 billion sovereign wealth fund reported its first quarterly loss in three years on Wednesday, hauled down by sliding bond and stock markets.

The world’s richest sovereign wealth fund owns about 1.3 percent of all global equities and has massive government and corporate bond holdings, so its performance and decisions are closely followed by investors across the world.

It lost 73 billion Norwegian crowns ($8.8 billion) in the second quarter – representing a negative return of about 1 percent on its investments. That was the first drop the fund had seen since the same period of 2012 – and a dramatic reversal from the record 401 billion crown gain in January-March this year.

The value of the fund’s bond holdings – which account for about a third of its portfolio – fell by 2.2 percent in the April-June quarter as yields increased in its main markets, including the United States, Europe and Japan.

Its equities – which make up the bulk of its investments – lost 0.2 percent, hit by a decline in U.S. stocks, which outweighed gains in Asia and flat returns in Europe.

“The fund’s results during the last several years have come from a rise in stock markets and the simultaneous fall in long-term yields, in fact in all yields,” said Trond Grande, deputy CEO of the fund, which invests Norway’s oil and gas wealth.

Many investors expect the U.S. Federal Reserve to start raising interest rates later this year, which would push yields higher.

“It would very quickly hit the value of our bonds … In the short run it would necessarily have a negative development for the fund,” Grande said, adding that coupon payments made from bonds could be reinvested at a higher yield if rates rose.

He declined to comment on his expectations for the global economy or on the investment plans of the fund, which holds $167,000 for each of Norway’s 5.2 million people.

The value of the wealth fund’s real estate investments – which account for just a fraction of its portfolio – rose 2 percent in the second quarter.

A strengthening of the Norwegian crown reduced the value of the fund by a further 53 billion crowns in the period, but this is not counted as part of its negative return as currency movements are expected to even out over time.

Currency movements had led to an increase of 175 billion crowns in the previous quarter for the fund, which makes its investments in foreign currencies but assesses its own size in crowns.

The fund has cut its share of bond investments to 34.5 percent of its portfolio, from 35.3 percent at the end of March. Its equity investments have risen to 62.8 percent, from 62.5 percent; while its property holdings have increased to 2.7 percent, from 2.3 percent.

Yngve Slyngstad, the CEO of the giant fund, spoke with Bloomberg’s Manus Cranny in Oslo and stated that monetary policy and China are the biggest issues facing Norway’s sovereign wealth fund.

Interestingly, Bloomberg reported on Tuesday that despite the selloff, the world’s biggest sovereign wealth fund isn’t about to lose its faith in China and it’s prepared to increase its investment there:

The $870 billion fund, built on Norway’s oil riches, says the current selloff and policy shifts from China’s leadership won’t change its long-term view on the world’s second-biggest economy, where it’s prepared to increase its investment.

“We’re following the movements there and we see that they are steadily opening and taking steps in the direction of opening up the markets,” Ole-Christian Bech-Moen, chief investment officer of allocation strategies, said on Tuesday in an interview during a conference in Oslo. “We’re thinking long-term, so the short-term policies there and policy shifts — it’s not that important for the longer-term strategic thinking.”

After years of lobbying, the Norwegian wealth fund this year had its quota for investments in Chinese A shares lifted to $2.5 billion from $1.5 billion. It had about $27 billion invested in China and Hong Kong at the end of last year.

If China’s market becomes even more liberalized, “we know that it will be a big allocation” for the fund, Bech-Moen said.

The People’s Bank of China’s surprise decision last week to allow markets greater sway in setting the currency’s level triggered the biggest selloff in 21 years and roiled global markets. Since then, 10 emerging market nations have said they are particularly at risk since China’s yuan devaluation.

Henry Paulson

Norway’s wealth fund held 9.6 percent of its stocks and 12.9 percent of its bonds in emerging markets at the end of March. It has been increasing its investments in those markets as it tries to escape dwindling returns in the developed world.

“Capturing broader aspects of global growth is something where we have a very long horizon, so it’s not really governed by short-term fluctuations,” Bech-Moen said.

Chinese officials have a tough job in confronting the economic slowdown and undertaking market reform, former U.S. Treasury Secretary Henry Paulson said at a conference in Oslo hosted by Norway’s oil fund.

President Xi Jinping “understands the importance of fixing the economy,” Paulson said. “He has unleashed a massive reform agenda that goes way beyond the economy. It goes to every part of China — economic, social and political.”

Writing on pensions, I understand all about very long investment horizons but when you see the wealthiest investors in China bailing out of the market, you have to wonder whether the bursting of the China bubble has way more to go before things stabilize there (history has taught us that much).

At this writing, U.S. stocks are trading sharply lower on Wednesday morning after a wild trading session in China sent other Asian markets down and as Wall Street awaits the release of the Federal Reserve’s July meeting minutes.

Everybody is worried about China and the Fed, including the bond king who came out once again after his dire warning to basically state the Fed would be making a mistake hiking rates with junk bonds at a four year low:

DoubleLine Capital’s co-founder Jeffrey Gundlach warned on Tuesday that it might be premature for the U.S. Federal Reserve to raise interest rates next month, given junk-bond prices are hovering near four-year lows.

“To raise interest rates when junk bonds are nearly at a four-year low is a bad idea,” Gundlach said in a telephone interview.

Gundlach, widely followed for his prescient investment calls, said if the Fed begins raising interest rates in September, “it opens the lid on Pandora’s Box of a tightening cycle.”

Gundlach said the selling pressure in copper and commodity prices driven by worries over China’s growth outlook “should be a huge concern. It is the second-biggest economy in the world.”

Last year, Gundlach correctly predicted that U.S. Treasury yields would fall, not rise as many others had forecast, because inflationary pressures were non-existent and technical factors, including aging demographics, were at play.

The Los Angeles-based DoubleLine Capital had $76 billion in assets under management as of June 30.

The DoubleLine Total Return Bond Fund (DBLTX.O), DoubleLine’s largest portfolio by assets and run by Gundlach, had positive inflows in July.

The Total Return fund attracted a net inflow of $390.4 million last month, compared with $81.7 million in June. It has $47.2 billion in assets under management and invests primarily in mortgage-backed securities.

I’m more convinced than ever the Fed has a deflation problem and it will be making a monumental mistake if it raises rates this year (Note: The Fed may have just gotten a red light for rate hike). The Wall Street green shoots keep telling us that everything is fine but I prefer reading Warren Mosler’s take on economic data, including his latest on U.S. housing starts and the Fed white paper, building permits, transport charts, Japan trade.

Stock markets around the world are doing what they always do, overreacting to news. Yesterday I noted that sentiment on emerging markets has reached a record low and I can pretty much say the same thing about the U.S. stock market where according to the Bank of America Merrill Lynch’s latest global fund manager survey, overall exposure to the US stock market moved to a 14% net underweight position, a level last seen in 2007.

The bears on Wall Street and around the world are growling, presenting some excellent buying opportunities for Norway’s sovereign wealth fund and other large global investors.

I continue to buy the big dips in biotech (IBB and XBI) and tech (QQQ) and steer clear of energy (XLE), mining and metals (XME) including gold (GLD) and pretty much anything related to commodities (GSC), emerging markets (EEM) and China (FXI). You can trade these sectors but be nimble and TAKE profits quickly.

Admittedly, my personal investment horizon is much shorter than that of pension or sovereign wealth funds, and part of me really loves trading these crazy schizoid markets. 

As far as Norway’s sovereign wealth fund, its fortunes are inexorably tied to public markets. That is good and bad. During a real bear market where stocks and bonds get killed, it will grossly underperform its large rivals, including Canada’s two biggest pension funds which are diversified across public and private markets.

What is good about being tied to public markets? One word: liquidity. Some of Canada’s sharpest pension minds, like Ron Mock and Jim Keohane, have sounded the alarm on illiquid alternatives which include real estate, private equity and infrastructure. 

Of course, when it comes to performance, the proof is always in the pudding. Over a ten year period, Canada’s top large pensions have mostly outperformed Norway’s sovereign wealth fund, which goes to show you that diversifying intelligently (more direct investments, less fund investments) into private markets pays off when managing a huge portfolio. 

Still, Norway is doing a lot of great things that others, including Canada’s large pensions aren’t doing. CBC News just reported that the Norwegian fund giant is putting a premium on ethical investing and this helps bolster returns. While I don’t doubt this, I caution investors and tree hugging vegans around the world, especially in British Columbia, to recognize the limits of so-called “ethical” investing.

There is one area where Norway is killing Canada, and I’m not talking about oil policy where we basically bungled things up again (learned nothing from our past mistakes). I’m talking about pension governance. I think we can learn a lot from Norway on this front.

In particular, Norway’s giant fund has great transparency and a solid governance model. I have long argued that Canada’s large public pensions need to improve on both of these fronts. I long to see the day where we cut the Office of the Auditor General and even the Office of the Superintendent of Financial Institutions out of auditing and supervising public and private pensions and put that responsibility squarely in the hands of the Bank of Canada like they do in Norway, the Netherlands and Denmark.

Canada’s pension plutocrats won’t like that last recommendation and they will tell you that keeping the government out of pensions is always the best governance, which is true, but I think things have to change a little to restore some balance in the way we govern our large public pensions and introduce more rigorous accountability and transparency in the way these large pensions invest and compensate their senior investment staff.

Hope you enjoyed reading this comment. Please remember to click on the ads and donate or contribute via PayPal on the top right hand side (of PensionPulse.com). As for Norway’s giant fund, feel free to contact me at LKolivakis@gmail.com as I’d love to work with you on all sorts of projects, including hedge funds, private equity, real estate, infrastructure and anything else.

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

Barbara Shecter of the National Post reports, CPPIB eyeing global investments, even as ‘difficult’ conditions push fund to losses:

The Canada Pension Plan Investment Board is continuing to pursue global investments, including a large transaction in Asia, even though declines in major global equity and fixed income markets hammered the returns of the CPP Fund in the first quarter of the fiscal year.

A $4-billion increase in assets came entirely from $4.2 billion in CPP contributions as the fund posted a net investment loss of $0.2 billion during the period that ended June 30.

“In a quarter where everything essentially went against us, to be flat is… a pretty good outcome,” said Mark Wiseman, chief executive of CPPIB, which invests funds that are not needed by the Canada Pension Plan to pay current benefits.

“Amid these difficult market conditions, our private investment programs generated meaningful income, exemplifying the benefits of building a resilient, broadly diversified portfolio.”

Wiseman said his team is able to continue pursuing investments around the world, including one he described as “a large transaction is Asia,” because the fund’s size and scale and diversification, and a long-term investment horizon, provide stability in these volatile times.

“Our comparative advantages, given the choppy market conditions, are coming to the fore,” he told the Financial Post.

“At some level, volatility is our friend. In conditions like this, we are able to transact and continue to diversify and build our portfolio [when] others are running in the opposite direction.”

At the end of the quarter, public equities accounted for just shy of 32 per cent of the asset mix, with fixed income at about 33.5 per cent.

Private equities sat at just under 18 per cent, with the balance in real assets (real estate and infrastructure).

The CPP Fund’s 10-year annualized real rate is return, accounting for the impact of inflation, is 5.8 per cent.

In 2012, Canada’s Chief Actuary said the Canada Pension Plan would be sustainable for 75 years at current contribution rates with a real rate of return of 4 per cent.

Returns over the past decade are “comfortably above” that assumption, CPPIB said Friday, adding long-term returns are a “more appropriate measure of CPPI’s performance than returns in any given quarter or single fiscal year.”

Also, Judy McKinnon and Rita Trichur of the Wall Street Journal report, Canada’s largest pension fund posts small negative return:

Canada Pension Plan Investment Board, the country’s largest pension fund, on Friday reported a negative net return of 0.1% for its fiscal first quarter, citing in part declines in major global stock and bond markets.

CPPIB said it had C$268.6 billion ($205.6 billion) of net assets under management in the quarter ended June 30, up slightly from C$264.6 billion at the end of its previous quarter on March 31.

CPPIB said the C$4 billion increase included a net investment loss of C$200 million, after taking into account its operating costs, and C$4.2 billion in pension contributions.

“Going forward, we are expecting to continue to see volatility in markets generally, in both fixed-income market and equity markets,” said chief executive Mark Wiseman. But that turbulence is also creating potential opportunities for CPPIB, he said.

“From an investment perspective, volatility is our friend,” Wiseman said, noting CPPIB’s scale and long-term investment horizon mean the organization can “continue to invest and diversify the portfolio across asset classes and across geographies”.

It has already been a busy year on the investment front. In June, CPPIB announced plans to acquire General Electric’s unit in private equity lending, which includes Antares Capital, in a deal worth about $12 billion. CPPIB has said Antares Capital will keep its name and operate as a stand-alone business.

The transaction is on track to close during the current quarter, said Wiseman. “With the Antares transaction, we’re extremely pleased with the quality of the team that we’ve acquired.”

Earlier in the day, CPPIB said its gross investment return in the period was flat at 0.01%.

CPPIB measures its performance on an annual basis against an internal benchmark based on returns from a mix of asset classes, but it doesn’t provide quarterly returns for that index.

In its latest fiscal year ended in March, it posted an 18.3% net return, outperforming its internal benchmark return of 17%.

CPPIB, which focuses on investments that generate steady returns over the long term to help fund its pension liabilities, said it had more than 25 investments during the latest quarter.

I’ve already covered CPPIB’s acquisition of GE’s private equity lending business and think it’s a great deal, perhaps the deal of the century for a large Canadian pension fund (it has risks but the benefits far outweigh these risks over the very long run).

CPPIB has been very busy lately, buying five U.K. student residences with 2,153 beds for $672 million and venturing into the Malaysian real estate business for the first time. The IPO of Neiman Marcus, a U.S. luxury retailer, will also help Canada’s largest pension fund boost its return.

As far as the slight negative quarterly return, I simply don’t pay attention to this stuff. It’s trivial and meaningless for a large pension fund that has a very long investment horizon and long dated liabilities.

I can say the exact same thing for the Caisse which recently reported its mid-year update as of June 30th, posting a six-month return of 5.9%. The media loves making a big stink on these quarterly and mid-year updates but I ignore them for the simple reason that what matters is fiscal or calendar year results over a one and more importantly, four, five and ten year period.

And Michael Sabia, the Caisse’s CEO, warned of global turbulence ahead as the fund topped benchmarks in first half:

The Caisse de dépôt et placement du Québec exceeded its six-month benchmark portfolio return in the first half of 2015, but says it sees warnings of a stormy global economic environment in the months and years to come.

“We see signs that cause us to wonder… about whether a slowdown in global growth is what we expect to see,” CEO Michael Sabia said Friday following an update of the Caisse’s yearly activities to June 30.

“It’s not time to go to the beach,” Sabia said. “It’s time to double down, lift our game, continue to outperform our reference portfolio and continue to try to do better on the market.”

Quebec’s largest institutional investor generated $1.7 billion more than projected in the first six months of 2015, with a 5.9 per cent return on clients’ funds, compared to its 5.2 per cent benchmark portfolio return.

The fund’s assets sit at $240.8 billion, up from $225.9-billion at the end of 2014.

“We think against a pretty volatile backdrop the portfolio of La Caisse has performed well with a substantial amount of value added,” said Sabia.

The CEO said he can’t predict whether this performance will continue over the second half of 2015 in an environment of growing economic and geopolitical risks.

“In the near term almost anything can happen. Markets fluctuate and this can happen on the basis of any number of things, some of them quite unseen at any particular time,” he said. “We’re not in the position to predict on a short-term basis and we don’t try to.”

The Caisse manages several large Quebec pension plans, and Sabia said it targets about a six per cent return to its depositors.

It reported a 10.2 per cent return over the past four years, adding $75 billion to its assets.

Sabia said meeting that same level of growth could prove challenging in the next four years, citing concerns over high asset valuation, a lack of central bank stimulus options and heavy indebtedness among Western countries.

“After such a long period of expansion in the market, how long is this going to continue?” he said.

“When we look across the global economy, we don’t see any big engines capable of accelerating global growth.”

Sabia says that although even the United States is showing only moderate economic growth, the Caisse is inline to make substantial investments there involving government on a municipal, state and federal level.

“I won’t go further than to say we are very upbeat about the opportunities we have in the U.S.,” he said.

The Caisse reports that over the past six months, each asset class in its portfolio generated a return above its index.

Equities returned 7.8 per cent with net investment results of $8.3 billion, while fixed income had a 2.7 per cent return, generating $2.1 billion.

Inflation-sensitive investments recorded a 4.6 per cent return, generating net investment results of $1.6 billion.

In the first half of the year, the Caisse acquired stakes in the Eurostar high-speed rail operator, and in Southern Star Central Corp., a natural gas pipeline operator in the U.S.

It also invested in the U.K. telecoms sector, SterlingBackcheck, one of the world’s largest background screening companies, and SPIE, a European engineering firm.

In Quebec, the Caisse invested in companies including Cirque du Soleil and Logistec, and launched an infrastructure subsidiary to work on projects in the Montreal area.

“The duck may look calm going across the lake, but I can assure you that there is a great deal of activity underway under the waterline,” said Sabia.

I like Michael Sabia, he’s a smart guy and hard worker who really learned a lot over the last five years, but I ignore his big calls on stocks and bonds. I can say the same thing about Leo de Bever, AIMCo’s former CEO, who is a very smart guy but made terrible market calls, especially on bonds.

To be fair to both of them, even the “best and brightest” continue to be confounded by the bond market because they simply don’t understand the Fed’s deflation problem or where the real risks lie in the bond market going forward. They all need to listen to the bond king’s dire warning and ignore hedge fund gurus claiming bonds are the bigger short.

In fact, some see oil heading as low as $15-$20 a barrel in the months ahead and the yield on U.S. Treasuries dropping a low as 1% on further yuan devaluation, fueling the rout in commodity prices and driving investors to seek safety in U.S.bonds.

If that happens, stocks are going to get killed this fall. One well-known market timer, Tom McClellan, sees stocks set up for ‘ugly decline’ as early as Thursday. I sent that article to a buddy of mine who replied: “What time on Thursday???”

It never ceases to amaze me how people love making big bullish or bearish calls and most of the time, they’re dead wrong. Can oil head lower? Sure, I’m not bullish on oil, commodity, energy or emerging markets but sentiment is so negative that they can all easily bounce from these levels. Are bond yields heading lower? Who knows? We are one financial crisis away from a crash in stocks, deflation coming to America and negative bond yields there (never say never!!).

But I’m not particularly worried right now because there is plenty of global liquidity to drive all risk assets much higher from these levels regardless of what’s going on in the global economy.

Will it be volatile? You bet it will but there will be plenty of opportunities for smart investors to capitalize in private and public markets. I just finished writing a long comment going over the holdings of top funds for Q2 2015 discussing some opportunities in specific stocks. People need to stop worrying and start digging and working hard to find hidden gems.

Anyways, enough ranting on stocks, bonds and commodities. Getting back to Canada’s large public pension funds, I’m not overly worried even if there is global turbulence ahead. I can say the same thing about most Canadian defined benefit plans which returned -1.6% in the second quarter, the first decline in investment returns since the second quarter of 2012, according RBC Investor & Treasury Services’ quarterly survey states.

The key difference between the Caisse, CPPIB, OTPP, PSP, etc. and other Canadian DB pension funds is they are better positioned to weather the storm ahead, if one is to develop. Their fortunes aren’t tied to the rise and fall of oil prices or the S&P/TSX because they are (for the most part) globally diversified across public and private markets.

Got that? So please stop reading too much into quarterly, mid-year or even annual results. They are pretty much irrelevant in the longer scheme of things.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg