Tuesday, August 15, 2017

CPPIB and Caisse's Performance Updates?

Jacqueline Nelson of the Globe and Mail reports, CPPIB manages gains amid global competition for ‘real asset’ investments:
With record amounts of capital seeking investments around the world, the Canada Pension Plan Investment Board still found ways to invest billions of dollars in recent months.

From buying an operator of international schools to developing logistics facilities in India, there was no shortage of deals turned out by CPPIB’s investment teams in its first fiscal quarter of 2018, which ended June 30. And new transactions announced since then indicate that pace is set to continue.

This comes at a time when there’s more than $1.1-trillion (U.S.) being held by private capital-investment funds around the world just waiting to be put toward new investments in private equity, infrastructure, natural resources and other so-called real assets, according to a recent report from data provider Preqin. 2017 is on track to be the largest fundraising year ever for private capital funds, exceeding the peak achieved before the financial crisis.

Mark Machin, chief executive officer of CPPIB, said that this trend is squeezing returns and encouraging more competition among investors. But he added that conversations between institutional investors have remained relatively friendly.

“There’s a massive world, and a massive opportunity set, and we have long-term relationships with people,” Mr. Machin said. “We intend to keep those relationships and work with the best and brightest where we can.”

CPPIB, the country’s largest pension fund and manager of the Canada Pension Plan’s portfolio, posted net investment gains of 1.8 per cent in its first quarter. During that period, total assets climbed to $326.5-billion (Canadian) compared with $287.3-billion at the same time last year. Assets increased $9.8-billion in the first quarter, and this gain was made up of investment income of $5.7-billion after costs, as well as $4.1-billion in net CPP contributions.

“Each major CPPIB investment program contributed to first-quarter results. Global equity markets produced a significant uplift and gains from fixed income improved,” said Mr. Machin of the main factors that moved returns this quarter.

Less helpful to CPPIB was the strengthening Canadian dollar, compared with most other major currencies. The pension fund’s philosophy has long been not to pursue a currency-hedging strategy, taking a view that the ups and downs of various countries’ coins and bills will balance out over the long life of the portfolio. That said, Mr. Machin noted that this trend had accelerated in the first half of the current quarter.

“To the extent that that continues, then we will see a dampening of our returns,” he said of the near-term impact.

The Caisse de dépôt et placement du Québec had its own issue with Canada in recent months as national equities performed worst of all the developed markets in the pension fund’s portfolio.

“The weak performance of the Canadian stock market this year contrasts with its strong returns last year and with those of major markets abroad,” Caisse chief executive Michael Sabia said in a statement.

Mr. Sabia noted that he is wondering about the monetary-policy actions that central banks will take in the coming months.

“There appears to be an emerging bias among central banks in favor of tightening monetary conditions. However, it remains to be seen whether these actions will be relatively modest and short-term, or more substantial and sustained over a longer period,” he said. “These scenarios are likely to have quite different consequences for market performance and economic growth.”

The Caisse reported financial results for the first six months of the year on Friday, producing a 5-per-cent return in the period as net assets climbed to $286.5-billion.

Both Mr. Sabia and Mr. Machin said that their portfolios had benefited from global equity-market gains. And both of their funds took steps to continue to diversify investment holdings in an effort to carve out new sources of returns in competitive markets.
You can read the press release on CPPIB's fiscal Q1 results here and la Caisse's mid-year results here.

Now, before I begin, I typically don't cover CPPIB's quarterly results or la Caisse's mid-year results. In fact, I truly believe both organizations should abolish these intra-year performance updates, they are a nuisance and in my opinion, totally useless.

Why? Who cares how CPPIB performs in any given quarter or what la Caisse's mid-year results are? These pension funds manage billions in pension assets for people who have long-dated liabilities, so the only results that truly matter are long-term results.

The other reason why I don't cover these performance updates in detail is they typically omit valuations of private markets, I know that's a fact for CPPIB but maybe la Caisse includes them in their mid-year results.

Having said this, following the 2008 debacle, la Caisse has to report its mid-year results by law and so does CPPIB, its law says the Fund will provide quarterly updates of its performance.

The big story in both these funds is global equities which rallied due to a shift in investor sentiment favoring global over Canadian equities.

However, as shown in the weekly chart of the Canadian dollar relative to the USD, the strength in the loonie impacted performance (click on image):


Keep in mind, CPPIB doesn't hedge its foreign exchange exposure which is a smart move over the long run because it effectively means the Fund is naturally long the USD over the long run. I believe the same goes for the Caisse, it doesn't hedge its F/X exposure.

Now, I'm on record with my top three macro conviction calls going forward:
  1. Long US long bonds (TLT) as I see the US economy slowing and global deflation spreading to the United States. 
  2. Long the USD (UUP) as I see the global economy following the US economy and slowing. Even if the Fed pauses its rate hikes, the USD will gain as global economies start slowing. If a crisis hits, it's bullish for the greenback and yen.
  3. Short oil (OIL), energy (XLE) and metals and mining (XME) shares as well as commodity currencies. Why in the world would you be long energy and commodities with global deflation looming around the corner? That's just plain nuts.
All this to say, if I was consulting la Caisse, CPPIB, and other large Canadian pensions, I would be diversifying outside Canada in both public an private assets and be very defensive at this stage, significantly increasing my allocation to US long bonds.

There will be plenty of opportunities that arise for large Canadian  pensions in the years ahead as I predict severe dislocations across global public and private markets.

In other news, Michael Sabia recently called on Quebec's government to fast-track light rail transit legislation:
The Quebec government must act quickly and pass a bill allowing construction to begin on the fourth largest automated transportation system in the world, the head of the province's pension fund said Friday.

Fund President and CEO Michael Sabia said if construction on Montreal's light rail system is to begin as scheduled in the fall, legislators have to adopt Bill 137 as soon as possible.

"I can't insist more strongly about the importance of Bill 137," he said on a conference call after the fund released its results.

"It's not just an option to pass the law quickly, it's absolutely essential."

The pension fund, called La Caisse de Depot et Placement du Quebec, partnered with the Quebec government to launch the $6-billion project.

If completed, it will be the fourth largest automated transportation system in the world after the projects in Singapore, Dubai and Vancouver.

The fund is contributing $2.67 billion, Quebec has promised $1.28 billion and the federal government confirmed in June it would contribute another $1.28 billion.

Macky Tall, head of the fund's infrastructure arm, said work is scheduled to begin in the fall, and therefore the Quebec government needs to pass Bill 137 quickly.

Quebec's legislature returns from summer recess Sept. 19.

During the first six months of 2017, the fund posted a 5 per cent return, compared to 4.8 per cent for its benchmark portfolio.

Over five years, the fund recorded a 10.6 per cent annualized return, which was more than its benchmark portfolio of 9.3 per cent.

As of June 30, it held $286.5 billion in net assets, an increase of $15.8 billion compared to Dec. 31, 2016.
Michael Sabia and Macky Tall are right, the government needs to fast-track these funds as soon as possible or risk costly delays in this massive light rail project.

La Caisse recently announced it will acquire a significant minority stake in Sebia, a global leader in the medical diagnostics sector, from Astorg and Montagu:
Headquartered in Lisses (Paris, France), Sebia is a global multi-specialty in-vitro diagnostics company focusing on oncology, genetic haemoglobin and metabolic disorders. The company is one of the pioneers of clinical electrophoresis.

With the support of CDPQ, Sebia intends to pursue the successful strategy of the past years, based on the reinforcement of its undisputed leadership position in multiple myeloma diagnostics, the global expansion of its diabetes franchise, and the continued search for other highly-promising applications for its differentiated technology.
You already know my thoughts on biotech and medical diagnostics, I'm bullish over the long run and believe this is a great deal for both parties.

Lastly, an update on the hyperthytoid market which I discussed on Friday. My buddy, a radiologist, did an ultrasound on my neck to see my thyroid and said: "The good news is there are no nodules, so you don't have thyroid cancer and won't need surgery or a biopsy. The bad news is your thyroid is destroyed, most likely from some sort of autoimmune thyroiditis so you need to go see an endocrinologist as soon as possible to regulate your thyroxine because it's causing you all sorts of terrible symptoms including major muscle weakness. You probably had this for a long time and didn't know about it."

Another buddy of mine, a cardiologist at Stanford University shared this with me:
The good news is that it's a highly treatable condition and it's quite straightforward to diagnose the cause. However, eventually, you may need thyroid replacement hormone paradoxically either because of the condition or the treatment. Not a big deal either but you will need to take the medication for rest of your life (very common situation for older women)

I am guessing you have some form of autoimmune thyroid disease (Grave's, Hashimoto's with hashitoxicosis presentation, or thyroiditis). Are you taking any immune modulating drugs right now for MS? Some are associated with thyroiditis (interferon alpha, Interleukin-2).
I haven't been on any drug for MS for over ten years, only diet, exercise, vtiamin D and recently started high dose alpha lipoic acid. I'm looking to get into a new study using biotin to treat MS.

All this to say, check your thyroid regularly, especially if you're an older woman, as you might be suffering from hypothyroidism and not be aware. The same goes for people on medication to treat some autoimmune disease (not just MS), check your thyroid regularly as the new drugs can wreak havoc on your thyroid. Once diagnosed, it can be treated by an endocrinologist, which is where I am headed now.

Below, Jim Lowell of Adviser Investments makes the case for active investors given the need for stock selection in the current market environment. I agree these aren't markets for robo-advisors shoving you in the hottest ETFs. The only ETF I like now is the iShares 20+ Year Treasury Bond ETF (TLT) and that's where I put all my money and the money of my loved ones.

You can also watch a recent interview with Michael Sabia and François Cardinal here where he discusses the light rail project (in French).

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