Monday, January 21, 2013

Canadian Funds Betting on Global Trade?

Glenda Korporaal of the Australian reports, Canadian pension funds plan investment splurge:
Canada's $120 billion Ontario Teachers' Pension Plan is looking at stepping up its investments in Australia with a minimum project target of $250 million.

Its interest comes as US and other Canadian pension funds have been increasing their investments in Australian property and infrastructure assets, with growing interest in potential privatisations of state-owned assets.

In an exclusive interview with The Australian, the Ontario fund's senior vice-president in charge of global infrastructure, Stephen Dowd, said Australia was a "really great market to invest in".

"We are a global investor and we look to numerous markets across the world, but we do find Australia is one of the attractive ones that we want to pay attention to," Mr Dowd said.

"Australia is open to foreign direct investment. There is a well-established regulatory regime, a very open business environment and a fundamentally healthy economy.

"We hope to find some good investments there."

The Canadian fund boosted its exposure in Australia last year to $1bn with a stake in a long-term lease of the Sydney desalination plant from the NSW government as part of a consortium with Hastings.

Mr Dowd would not comment on reports the Toronto-based fund is teaming up with the Westpac-owned Hastings Funds Management to bid for two ports being sold by the NSW government, the Port of Botany and Port Kembla -- a deal estimated to be worth as much as $3bn.

Mr Dowd said the Ontario Teachers' fund had a "good relationship with Hastings".

"We have known them for a long time. We feel they are very aligned partners and we are happy that we invested with them in the desalination plant," he said.

Mr Dowd said his fund also had an "open dialogue" with the federal government-owned $80bn Future Fund and Industry Funds Management, a $37bn fund owned by industry superannuation funds in Australia, but it had yet to do any deals with them.

He said the Ontario fund generally looked to put in a minimum of about $250m into infrastructure investments and was looking for investments it would hold for the long term.

Canada's largest pension fund, the $170bn Canadian Pension Plan Investment Board, which last year agreed to invest $1bn in the Barangaroo project on Sydney Harbour with Lend Lease, is also believed to have teamed up with the Macquarie group in another consortium to bid for the two NSW ports.

The Alberta Investment Management Corporation, which spent $415m buying Great Southern Plantations in early 2011, is also believed to be looking at joining a consortium, and there are reports another Canadian fund, Borealis, could also be interested.

The successful bidder is expected to be announced as early as April, with due diligence now under way.

"We continue to see strong interest from Canadian pension funds, both in our real estate and infrastructure assets," Andrew Cannane, the head of business development and corporate client relationships for The Trust Company, said yesterday.

"They like the relative strength of the Australian economy as against others, and the fact that we have sufficient integrity in our structural infrastructure to ensure commercial opportunities get done and with legal predictability," he said.

Mr Cannane said the Australian dollar may have increased against the US dollar in recent years but the Canadian dollar has also been strong, which made the strong Australian dollar less of an issue for Canadian investors here.

He said some of the big Canadian funds also felt more comfortable investing in Australian infrastructure than in Chinese.

"I have heard the anecdote that a Canadian pension fund would prefer to invest in an Australian port servicing China, than a China port," he said.

Mr Cannane said Canadian funds were still interested in prime property in Australia.

But he said there was a shortage of quality infrastructure deals, which was why there was such strong competition for deals such as the two NSW ports.

"There is strong competition for the quality assets that do come up," he said. "They would love 10 NSW port deals.

"If there were more infrastructure to invest in here there would be even more capital flowing."

Canada's second-largest pension fund, the $160bn Caisse de Depot from Quebec, made its first investment in Australia last year, pouring some $139m into taking a stake in the Melbourne Convention Centre and other assets owned by the Plenary Convention group.

The Quebec fund followed up in November last year with a $40m investment in the Victorian Comprehensive Cancer Centre Project.

The second-largest pension fund in the US, the $150bn California State Teachers Retirement System, last year gave the Melbourne-based Industry Funds Management group a $500m mandate to invest in infrastructure in Australia and overseas.

Mr Dowd said the Ontario fund was interested in investing in assets such as ports and electricity companies but would not say whether it would be bidding for any other ports up for sale in Australia or the electricity assets for sale in NSW. "Both sectors are of interest to us and we evaluate opportunities like that around the world all the time," he said.

In 2007, Mr Dowd led a $US2.4bn deal to buy four container terminals in North America for the fund.

Mr Dowd said the Ontario Teachers' fund also had other investments in Australia, including shares, but did not provide details.

The fund's website shows that it had a $122m investment in Rio Tinto and $109m investment in shares in News Corporation, the publisher of The Australian, as of December 2011.

Mr Dowd said the Ontario fund did not have any property investments in Australia but it had been looking at infrastructure investments in Australia for more than a decade.

He said it had made some unsuccessful bids for infrastructure assets with the Hastings fund some years ago.

Canadian Pension Plan Investment Board and Ontario Teachers' fund both bought stakes in toll road operator Transurban some years ago and made bids for the company in 2009 and 2010.

Both funds later sold out of the company.

Mr Dowd said the Ontario fund, which had built up a 13 per cent stake in Transurban before it sold out, had learned some lessons from its unsuccessful bids for the company.

"We learn lessons from everything we do, whether we are successful or not, and we try to apply them to the next deal we do," Mr Dowd said.

"In that case we were unsuccessful because the board did not like our value. One of the lessons to learn for us (from that deal) is that it is important for us to stick to the analysis we have done and the value we have come to.

"If we are not successful, we are not successful and we move on."

The Ontario fund also had an 11 per cent stake in Sydney Airport with the Macquarie group that it exchanged for stakes in Brussels Airport and Copenhagen Airport in 2011. The fund plans to set up an office in Hong Kong later this year to expand its investments in Asia.

"As a global investor we think it is very important to be in contact with important markets," Mr Dowd said. "Asia is more and more important to us as a market to invest in."

Mr Dowd said the fund was looking for "hard assets with positions which are protected from market competition". He said: "We are looking for stable, cashflow-generating assets."
Interestingly, in another major deal,  the Ontario Teachers' Pension Plan says it plans to acquire SeaCube Container Leasing Ltd., one of the world's largest container leasing companies:
No overall value on the deal was disclosed by Teachers, but it said SeaCube (NYSE:BOX) shareholders will receive $23 in cash per common share. The company has just under 20.3 million shares.

The offer represents a 13.3 per cent premium over SeaCube's Friday's closing price and a 25 per cent premium over its 50-day volume-weighted average price. It is also a 130 per cent premium over the issue's initial public offering price in October 2010, Teachers said.

The transaction has been unanimously approved by the board of directors of SeaCube and is expected to close in the first half of 2013, subject various regulatory and shareholder approvals.

Park Ridge, N.J.,-based SeaCube has seven offices worldwide and owns, manages and leases containers for the global containerized cargo trade. The equipment is primarily leased under long-term contracts to the world's largest shipping lines.

"SeaCube is a good fit with our investment criteria of providing reliable income streams, consistent performance and growth opportunities," said Lee Sienna, vice-president, long-term equities at Teachers.

With $117.1 billion in assets as of Dec. 31, the Ontario Teachers' Pension Plan is the largest single-profession pension plan in Canada. It invests the pension fund's assets and administers the pensions of 300,000 active and retired teachers in Ontario.
Buying stakes in Australian ports and snapping up one of the world's largest container leasing companies aren't deals you do if you think global trade is about to tank again. It's obvious Ontario Teachers' and other Canadian pension funds are betting on a global economic recovery.

Are Canadian pension funds doing the right thing? Interestingly, according to The Economist, the answer to this question may lie in what a big American port says about a shift in global trade patterns:
If trade routes are the global economy’s circulatory system, the port of Long Beach is one of the valves. Last year the port processed 6m containers, making it America’s second-busiest (neighbouring Los Angeles is number one). Nearly 5,000 vessels visited Long Beach in 2012. Their scale is vast. The OOCL Asia, a container ship observed recently by your correspondent, resembles a floating car park. It has a capacity of 8,000 twenty-foot-equivalent units (TEUs); vessels that can carry almost three times as much may be on the way.

Trucks line up at the port entrance, gleaming in the Californian sun: the grubby fleet of yesteryear has largely been retired by environmental rules. The containers are unloaded, stacked and eventually picked up for distribution across America—by train if the destination is over 600 miles (966km) away, otherwise by truck. After the trucks pass through a mandatory check for radioactivity, many of them will head to warehouses in the Inland Empire, the urban sprawl east of Los Angeles.

Ports like Long Beach cannot tell the whole story of world trade. Although up to 90% of trade by volume is seaborne, low-value “dry bulk”, like the scrap metal piled up at one Long Beach terminal, accounts for about half of it. Small, valuable stuff often goes by air. According to Jock O’Connell at Beacon Economics, a consultancy, the average value of a kilo of containerised cargo arriving at Los Angeles/Long Beach ports in the first 11 months of 2012 was $6.34; at LAX airport it was $102.78.

But Long Beach still offers a prism on the global economy, and on US trade in particular. For one thing, the airborne share of trade is declining as the efficiency of seaborne trade grows. Los Angeles and Long Beach are spending over $5 billion between them on infrastructure to cope with ever-larger ships. Long Beach is building Middle Harbour, a 321-acre (130-hectare) container terminal that will be able to receive vessels of up to 18,000 TEUs. This month construction began on a replacement for the Gerald Desmond bridge, which will allow larger vessels to penetrate deeper into the harbour.

The routes plied by these ships provide clues to the strength of the world’s big economies. Throughout the 1990s and 2000s Los Angeles and Long Beach ports benefited as Asian countries, particularly China, were integrated into the global trading system (see charts). Container traffic at Long Beach has more than doubled since 1995. Trade volumes slumped dramatically in 2008-09, and activity has yet to regain its pre-crisis peak. But the outlook is strong: a 2009 report predicted a doubling of container traffic at Los Angeles/Long Beach by 2030. A proposed Pacific free-trade agreement could boost maritime trade further; Europe’s doldrums have already seen ships redeployed to transpacific routes.


The cargoes that fill the ships at America’s ports reflect changes in US consumption patterns (eg, fewer oil imports as domestic production increases). They also illuminate rising wealth abroad: last year the value of agricultural products exported from west-coast ports exceeded that of recyclable materials for the first time, thanks in part to Asia’s growing taste for meat.

And the proportion of containers that leave the terminals empty after having arrived full tells a story about America’s persistent trade deficit. Last year at Long Beach it was about half. This proportion may well shrink. In 2010 Barack Obama called for a doubling of American exports within five years. That goal is starting to look too ambitious, but the export sector has been outpacing the economy: in the 12 months to September 2012 American exports of goods and services were worth over $2.1 trillion, 38% more than in 2009.

A big boost could come from the export, in liquefied form, of the natural gas opened up by America’s shale boom. The Department of Energy must approve all LNG exports, and licences for most countries are hard to obtain. But producers are hungry to take advantage of higher prices abroad. Asia currently accounts for almost two-thirds of global LNG imports. This leaves Pacific states like California well placed to take advantage, should politicians adopt a more relaxed attitude.

Other developments may not help the west coast. The much-heralded expansion of the Panama Canal, now postponed until April 2015, will make room for vessels with a capacity of up to 13,000 TEUs (only tiddlers below 4,400 TEUs are now allowed). Over time that could mean a shift of business away from Long Beach to east-coast and Gulf of Mexico ports, though how much will partly depend on the canal’s fees and the capacity of these ports.

Anthony Otto, president of Long Beach Container Terminal, does not sound too concerned. Last year LBCT’s Hong Kong-based parent company placed a big bet on Long Beach’s future by taking out a 40-year, $4.6 billion lease at Middle Harbour. The transit times, facilities and cost structure at Long Beach, says Mr Otto, will ensure it stays the “preferred gateway” to American consumers for many shippers.

But some things the port can do little about. One is the growth of non-traditional trade routes (see article). The China-Brazil connection is increasingly vital. Pascal Lamy, head of the World Trade Organisation, has suggested that Africa could be China’s biggest trade partner within three to five years. Another challenge is “nearshoring”, the shift of manufacturing capacity closer to American consumers (see our special report). Mexico has been the big winner here: since 2010 it has outpaced China in increasing its exports to America. Most goods travel over land: fine news for truckers and trains, less so for ports.
How can ordinary investors profit from a recovery in global trade? I've already commented on individual stock recommendations in my comment on receiving a lump of coal for Christmas. I'm long coal, copper, and steel (CSC), agribusiness stocks (like Potash) and now watching closely shipping stocks which got decimated after the last recession.

Below, an interesting discussion on the shift in global trade. Panelists Murray Hiebert, Marc Mealy and Clyde Prestowitz assess signs suggesting that China may have ceded its competitive edge to emerging markets elsewhere in Asia and around the world. Irene Dorner of HSBC USA introduces the program. (1 hr., 24 min.)