long term investment | Pension360

Canada Pension Chief Talks About “One of the Best Investments We’ve Ever Made”: Investing in Alibaba in 2011

The chief executive of the Canada Pension Plan Investment Board (CPPIB) talked with the Financial Post on Thursday about the Board’s investment in Alibaba in 2011.

At the time, Alibaba was an unknown tech company in China. A few years later, the company’s initial public offering was the largest in history.

From the Financial Post:

[Wiseman] said the reason the Canadian pension fund manager was able to make a “very sizeable investment” in what was then “an obscure Internet company” in a city in China few had heard of is because executives had opened an office in Hong Kong back in 2008.

“That investment story which everybody is touting as one of the best investments we’ve ever made, it didn’t happen overnight. That investment started in many respects almost seven year ago,” Mr. Wiseman said.

“It started with a view towards that market, a view that we need to build capabilities in the region, that we need to deepen our understanding of the region, and that we had a long-term view around the Chinese consumer, the importance of the Chinese consumer.”

Mr. Wiseman said the route to the Alibaba investment, which is worth “substantially more” than the fund’s cost base thanks in part to a large investment in the successful IPO last month, illustrates the long-term strategy and the “on the ground” investing style.

“We didn’t get brilliant in four weeks, right? … We had people on the ground in Hangzhou [the city in China where Alibaba is based] before people knew where Hangzhou was,” he said.

“We were there soon after opening our office in Hong Kong, developing those relationships with people who speak the language and who understand the market… To me, this is exactly what we’re trying to do as an organization.”

After the initial investment in 2011, CPPIB increased its stake the following year and then again through the IPO, Mr. Wiseman said.

The CPPIB has a total of $314.5 invested in Alibaba.

Photo by Charles Chan via Flickr CC License

Canada Pension Eyes Oil As Prices Drop

The head of the Canada Pension Plan Investment Board (CPPIB) said Thursday he sees “increasing opportunity” for investment in Canadian energy companies as oil prices continue their recent decline.

From a Bloomberg interview:

“We are seeing a period now where there may be increasing opportunity in the Western Canadian basin and Canadian energy companies as the market sort of reprices,” Mark Wiseman said in a telephone interview today.

Brent crude extended losses below $80 a barrel, dropping to a four-year low on speculation Saudi Arabia will not reduce output amid a glut of supply.

Wiseman said the resulting decline in oil prices will put pressure on some of the less financially sound energy companies, potentially creating some opportunities for acquisitions.

“Our attraction will be to those best-quality assets, best-quality management teams, and best-quality companies,” he said.

Wiseman, chief executive officer of the fund, pointed to Canada Pension’s investment in Seven Generations Energy Ltd. (VII) as an example. The pension fund is the largest shareholder, holding more than 15 percent of its common shares, according to data compiled by Bloomberg.

Canada Pension, which was an early investor in Seven Generations, didn’t sell shares in the company’s initial public offering last month because it sees long-term opportunities in the company. Seven Generations debuted in Toronto on Oct. 30 at C$18 a share and has since climbed to $22.50 today.

“It’s a great example of the long-term view we take,” Wiseman said. “We made a very conscious decision that we want to watch that value accrete and grow over the long term.”

The CPPIB manages $206 billion in assets for the Canada Pension Plan.

Photo by ezioman via Flickr CC License

Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.

Cutting Investment Fees – A Key To Secure Retirement?

Charles D. Ellis wrote a thoughtful article in the Financial Analysts Journal recently about the hard choices that people– and institutions – must face sooner than later regarding retirement and pension systems.

One of the main facets of the article’s thesis:

We need to make hard choices on how much to save, how long to work, how to invest, and how much to draw from our savings for spending in retirement.

The article is full of great discussion on these points. After someone stops working, a big part of their financial security stems from controlling costs – not just living expenses, but investment expenses, as well.

From the article:

Most investors somehow believe that fees for investment management are low. Fees are not low. Here’s why: By convention, fees are shown as a percentage of the assets, say, just 1%. But that’s seriously misleading. The investor already has the assets, so the manager’s fee should be stated as a percentage of the benefit (i.e., returns).

If returns are 7%, then the same fee in dollars is 15% of returns. And because index funds deliver the full market return with no more than the market level of risk for a fee of 0.1%, the real cost of active management is the incremental cost as a percentage of the incremental benefit of active management. That’s why the true cost of active management is not 1% or even 15%. Because the average active manager falls short of his chosen benchmark, the average fee is more than 100% of the true net benefit.

Increasingly, investors are learning that one way to reduce costs—and increase returns—is to save on costs by using low-cost index investments, particularly with their 401(k) or other retirement plans.

How your retirement funds are invested is important because many of those dollars are invested for a very long time—20, 40, even 60 years.

The article, titled “Hard Choices: Where We Are”, is available for free from the Financial Analysts Journal.

Photo by 401kcalculator.org

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