Tuesday, June 13, 2017

IPCM 2017: A New World For Pensions?

Prensa Latina reports, Businessmen, Politicians Attend Montreal Conference:
The twenty-third edition of the Montreal Conference will begin today in that Canadian city with the presence of about 4,000 representatives of governments, civil society and the private sector of a dozen countries.

Under the title Un nuevo mundo (A New World), administering change, the event will be held until Thursday, June 15, with the presentation of around 200 special speeches of experts that will address the theme of the links between the Americas and other regions.

In a welcome message to the participants, Prime Minister Justin Trudeau stressed the importance of this exchange so that political leaders and entrepreneurs take the necessary measures to meet the challenges of today's world on issues such as climate change, education , Migration, diversity and technological development.

The annual meeting will be attended by top officials of the Canadian Government, including foreign minister Chrystia Freeland, as well as International Trade Ministers François-Philippe Champagne and the head of International Development and Francophony, Marie-Claude Bibeau.

According to an official release, these and other personalities from the host country will hold meetings with political leaders, representatives of the business sector, international organizations and non-governmental entities.

Leaders of the Montreal Conference say that the entity is a non-profit organization, committed to the dissemination of information on problems of the global economy, 'with a particular emphasis on the links between the Americas and other continents.'
On Monday morning, I woke up early to attend the pension portion of the 2017 Conference of Montreal. You can see the list of speakers here and the entire program here.

Below, I provide you with the mission and background of this conference:
The International Economic Forum of the Americas (IEFA) was created in 1995 to achieve the following: to promote understanding of major international economic challenges in order to have far-ranging discussions on current social and political issues. To reach this aim, the IEFA organizes annual events where heads of state and government, members of the business community and civil society, trade union leaders and academics – all of them experts in their respective fields – can meet and discuss both their common objectives and ways to achieve them. In 2017, the IEFA will expand its mission by adding a fourth conference (the Conference of Paris) to its line-up of events.
The working breakfast session was moderated by Clément Gignac, Senior Vice-President and Chief Economist, iA Financial Group. It was titled "Return Rates and Risk Management: The Impact of the New Economic Context" and featured three panelists:
  • Lisa Emsbo-Mattingly, Director of Research, Global Asset Allocation, Fidelity Investments
  • Phil Edwards, Global Director of Strategic Research, Mercer
  • Eric Girard, Senior Vice-President, Corporate Treasury, National Bank of Canada 
Unfortunately, I got to the conference a tad late and by the time I registered, only caught a piece of Phil Edwards' presentation and missed Lisa Emsbo-Mattingly's presentation.

But I did catch Eric Girard's presentation and the Q&A which was excellent. Eric whom I know well from my days working at the National Bank began his presentation by stating something "controversial", namely, "pensions need more bonds in their portfolio."

He began by quoting Montreal's Jacques Lussier, founder of Ipsol Capital (another great alpha shop in the city) and co-author of the newly released Rational Investing: The Subtleties of Asset Management, who once noted: "Diversification in developed markets is unreliable when most needed."

Eric also stated in order for stress tests to be worth anything, "they need to be scary". It's ok to stress test your portfolio assuming a 20 or 30% haircut on the S&P 500. 

He said pensions have been wisely allocating to private markets (private equity, real estate, and infrastructure) to lower volatility and maximize returns but they should also "leverage their bond portfolio to reduce risk of the overall portfolio."

This is basically what HOOPP and Ontario Teachers' have successfully done for years through their bond repo operations. Of course, HOOPP and Ontario Teachers' have the right governance to intelligently leverage up their bond portfolio and they have the legal right to do this through their investment policy (which others don't have a right to do).

During the Q&A, Phil Edwards noted that many British pensions that leveraged up their bond portfolio in the past had trouble recollateralizing their  portfolio as rates rose (I would love to get more information on this from experts).

Eric made me laugh stating "as an economist my ability to predict past six months is nil." On a more serious note, he added: "This is is why it's easier to construct your portfolio to let the market underperform instead of trying to always outperform the market."

[Note: Eric Girard and Louis Vachon, President and CEO of the National Bank of Canada, come from the Jean Turmel school on markets, which is always manage your downside risk. Mr. Turmel is the president of Perseus Capital, a macro fund he founded in 2005, and he is the Chair of the Board at Ontario Teachers' Pension Plan.]

The second investment session I attended was at 10:30 in the morning, "Adapting Investment Strategies to the Rising Geopolitical Risk". It was moderated by Bernard Morency, the former Executive Vice-President of Depositors and Strategy at  Caisse de dépôt et placement du Québec and featured three panelists: 
  • Marko Papic, Senior Vice-President, Geopolitcal Strategy, BCA Research
  • Philip Stephens, Chief Political Commentator, Financial Times
  • Henri-Paul Rousseau, Vice-Chairman, Power Corporation of Canada (PCC) and Power Financial Corporation
Marko Papic put up a few nice charts. I remember one showing how inequality has grown tremendously in the US following the 2008 crisis but not as much in Europe because of the social safety net. 

Marko was surprisingly a lot more upbeat on Europe stating that Macron's victory has bolstered the agenda for major reforms in France and will lead to a new alliance with Germany, one that will improve the Eurozone (I remain highly skeptical). He said the biggest long-term risk lies with China (not the Middle East) where the Sino-American symbiosis is in jeopardy. 

Philip Stephens echoed those concerns stating "China is looking to be the preeminent Asian power" and won't accept US encroachment there and that US withdrawal from global affairs has led the world to "no-man's land."

In his remarks, Henri-Paul Rousseau stated that in a low growth, low inflation, low return world, markets will be a lot tougher on active managers and because of this, "geopolitical risks are increasingly part of the investment process." He added: "Deglobalization means geography and sector exposure will be more important going forward."

[Note: Those of you who want to dig a lot deeper into inequality and geopolitcal risks in developed markets and how they will impact markets should read my comment on whether capitalists can afford a trumped recovery, going over papers by Shimshon Bichler and Jonathan Nitzan, a former BCAer who went on to become a professor of political economy at York University.]

My lunch isn't covered by the conference so I didn't attend the opening luncheon. Instead, I went upstairs to eat, answer some emails and drink a lot of water. The sweltering heat exacerbated my MS symptoms and my back was in agonizing pain. I brought my cane to the conference as I knew there would be a lot of walking but wearing a suit and tie in the sweltering heat made me weak so I took some time at lunch to relax and replenish my body with plenty of fluids (there are only so many back to back sessions you can go to without passing out).

At 2:45, I made my way back down to attend the afternoon investment session, "Investment Perspectives For a Shifting World". It was anchored by Amanda Lang of Bloomberg TV Canada and featured three panelists: 
  • Paul Podolsky, Partner, Bridgewater Associates
  • Jean Raby, CEO, Natixis Global Asset Management
  • André Bourbonnais, President and CEO, PSP Investments
I had a chance to introduce myself and briefly chat with André prior to that session and he told me PSP was tabling its fiscal year results to Parliament on Wednesday and the results will be made public (update: see results here). He also told me he was very pleased with the Private Debt operations run out of the New York office and headed by David Scudellari, Senior Vice President, Head of Principal Debt and Credit Investments. 

I also met up with a former colleague of mine from my days at the Business Development Bank of Canada (BDC), Maria Constantinescu, who recently left the BDC to join PSP as a Senior Director of Public Affairs and Strategic Communications.

Interestingly, I told Maria that communications at PSP has vastly improved over the last year and she credited all this to André Bourbonnais and her boss, Dominique Dionne, Vice-President, Public Affairs and Strategic Communications at PSP and a graduate of Harvard Business School.

Maria shared this with me: "I enjoyed my experience at the BDC, it has really changed since you worked there. The main reason why I joined PSP was Dominique, she is amazing and I'm looking forward to learning a lot from her." She told me she has a steep learning curve to understand pensions and investments and I told her not to fret, that's what my blog is there for, to educate people on pensions and investments.

I told her I ran into Jérôme Nycz at lunch, my former boss at the BDC who is now in charge of BDC Capital and she told me that Jérôme has transformed that sector to make it very profitable (very good news for BDC as that sector used to struggle a lot).

Maria also told me since Michael Denham was appointed President and CEO of the BDC back in the summer of 2015, the organization has taken a turn for the better (glad to hear this although I had no qualms working under the former CEO, Jean-René Halde and always found the BDC was a well-run Crown corporation). I saw Mr. Denham from far sitting next to Jérôme at the inaugural plenary session of the conference in the morning but didn't get a chance to introduce myself.

Anyway, back to the afternoon investment panel. After some serious and funny opening remarks from Jean Chrétien, Canada's former Prime Minister, the panelists shared many wise insights.

Paul Podolsky said there are three things they are watching at Bridgewater:
  1. Unprecedented monetary stimulus has been a boon to financial assets and the economy in the near term
  2. Further out, Bridgewater thinks things look scary as rising inequality is spreading populism in many countries (see Bridgewater's recent paper on populism here). 
  3. Imbalances in Europe and China are a big concern.
On China, Podolsky stated that their wage advantage (1978-2008) is coming to an end and that rising debt is a major concern but it's in their currency so it is more sustainable. However, it remains to be seen how Chinese policymakers can shut down state subsidized banks and companies without having a ripple effect in other sectors of its economy and the global economy.

Without explicitly stating it, Podolsky shares my views on a debt deflation economy. He said debt levels are so high that central banks are limited to what they can do to raise rates if the global economy improves. In this environment, all central banks can do is buy assets to relieve pressure on the financial system but this exacerbates inequality (which ironically is deflationary).

Jean Raby said the "Brexit outcome is still unknown and there is a wide range of possibilities." He too noted that policy choices in China can have ripple effects on emerging markets and the rest of the world.

On investments, André Bourbonnais said pensions and other institutional investors are under-estimating the risks of infrastructure investments, seeing them as a substitute to bonds, but neglecting the high valuations and regulatory risks of these investments.

André said that following Brexit, PSP slowed its activities in infrastructure and real estate in the UK, and even sold some assets (real estate) but it remains committed to investing in that country and recently opened a London office and sees it as its European growth hub. 

Interestingly, on the direction of US interest rates, André noted that "if you want to kill a trillion dollar infrastructure plan, you can hike rates" (I totally agree).

He noted PSP has to attain a 4.1% real rate which the government sets along with the Chief Actuary, and that it enjoys positive net cash flows for a few more years. To attain this bogey, it uses a combination of active management which adds significant value over a reference portfolio. 

On risk management, André noted that diversification is the "only free lunch left" and that they cannot predict the next downturn but invest across public and private markets all over the world with a long investment horizon to manage the inevitable cyclical downturns. 

Interestingly, he noted the advantage of a large pension like PSP is that it can invest in private markets all over the world, something which isn't available to retail investors. 

He said that PSP is under-allocated to China and over-allocated to South Korea as a result of good investment decisions and great partners. He said they will look to add investments in China over time through strategic partnerships (I think PSP is underweight emerging markets at this time).

On prospects for Canada, Paul Podolsky praised the regulatory and banking system but said household leverage remains very high and there will be a painful adjustment (ie. all you hedge funds that got burned by the Bank of Canada yesterday on your loonie shorts should stay the course and keep shorting our currency).

André Bourbonnais was more positive on Canada stating he thinks "commodity prices have bottomed" (I respectfully disagree) and that advances in artificial intelligence will benefit many Canadian companies. He said PSP is exposed to Canadian investments as their liabilities are in Canadian dollars but they are looking to diversify more globally, so Canadian exposure will decline over time.

André Bourbonnais also struck a more reflective note on artificial intelligence stating he is concerned about the "social impact of technology" which offers productivity enhancing benefits but also displaces many people from good jobs.

PSP Investments posted something on its twitter account which captures exactly what André said on the evolution of technology at the conference (click on image, passage is in French):


Without getting into too much detail, go back to read my recent comment on Citadel's Ken Griffin warning of inflation where I went over yet again six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government debt levels and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Technological shifts: Think about Amazon, Ubber, Priceline, AI, robotics,  and other technological shifts that lower prices and destroy more jobs than they create.
I think I have covered enough here and I'm tired as these conference comments take a lot out of me.

I wish the conference had a dedicated YouTube channel where they post all the presentations so everyone can listen to some great discussions that take place at this conference.

This was the second year in a row that I attended this conference. I don't know if I will do it again unless I have a corporate sponsor. To be honest, I want to talk to Bernard Morency and Henri-Paul Rousseau about having a completely separate one day pension conference which I think we can improve on but I understand why it's part of this conference.

The problem is that there were other sessions I wanted to attend but couldn't because I can't be at two places at the same time or I was exhausted. For example, I wanted to hear the panel Paul Desmarais Jr. moderated in the late afternoon on innovation and competitiveness featuring Silver Lake's co-founder Glenn Hutchins (love this guy, he is really smart on productivity and much more), but was too exhausted so I left the conference (and got caught in traffic on the way back home in a non air conditioned cab! ARGH!!).

But I must say, this year's conference was even better than last year's conference which was excellent. Gil Rémillard, the founding chairman of this conference, and the organizers did an outstanding job. I highly recommend you attend it and I wish I went back early this morning to hear a panel which included professor James Galbraith discussing the growth of inequality and how it breeds populism. 

Alas, I can't do it all. Hope you enjoyed this comment and if there is anything to add, feel free to reach me at LKolivakis@gmail.com. Please remember to kindly donate and/ or subscribe to my blog via PayPal under my picture at the to right-hand side (remember, I don't get paid or sponsored to cover these conferences, it all comes out of my pocket).

Those of you who want to see clips from last year's IPCM conference can do so by clicking here. Below, I embedded a couple of sessions from last year's conference that I really enjoyed (in particular, listen to Leo de Bever's presentation and Q&A comments in the second clip).

I wish the conference organizers would get a dedicated YouTube channel to put up all the presentations so everyone can watch them as soon as possible. If anyone knows where I can find the latest clips, please let me know via email (LKolivakis@gmail.com).

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