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An Overseas Asset Buying Spree?
Stefania
Moretti of QMI Agency reports in the Toronto Sun, Canada's
pension funds on overseas asset buying spree:
Canadian
pension funds are crisscrossing the globe with cash in hand in search
of assets for revenue to support this country’s aging population.
One place they’re looking is foreign
infrastructure assets, according to the Canada Pension Plan Investment
Board’s senior vice president of private investments Andre Bourbonnais.
Infrastructure assets - such as electricity generation, water
distribution and airports - are easy to operate and maintain, generate
predictable cash flows, offer protection against inflation and can be
owned for a very long time, Bourbonnais told QMI Agency Thursday.
“There’s
not a lot of complexity in operating a toll road for instance,” he
said.Late Wednesday, the CPPIB
revived its bid for Australian toll road operator Intoll Group
with a $3.5-billion offer. The Sydney-based company also owns a
minority stake in Toronto’s 407 electronic toll highway.
In
May, the CPPIB snapped up a minority share in two prime Manhattan
buildings for $663 million.
And last year it was part of the
largest leveraged buyout of 2009 — the $4-billion acquisition of IMS
Health Inc, a prescription drug sales data provider.
The
Ontario Teachers Pension Plan has also been on a foreign buying spree
after recently picking up U.K. state lottery Camelot for $536 million.
The teachers' fund has also tried to up its share of Australian
toll road companies Intoll and Transurban in recent months.
And
there have been reports the teachers, along with Ontario
MunicipalEmployees Retirement System, could be involved in a
multi-billion dollar bid for a U.K. high-speed rail franchise.
The
CPPIB launched its aggressive infrastructure investment plan roughly
five years ago.
“We’ve been looking
globally at infrastructure assets,” Bourbonnais said, adding policy
conditions in Australia and the U.K. are quite favourable right now.
Bourbonnais said the fund will likely pursue other deals with
similar characteristics as Intoll.
“The predictability of the
return and long-term ownership of those assets fit well with our
mandate,” Bourbonnais said.
The CPPIB has assets totalling
$127.6 billion after funds returned to pre-recession levels earlier
this year.
Today, the CPPIB receives more contributions from
working Canadians than it pays out in benefits. But that is expected to
reverse by 2021, when Canada’s workforce is expected to shrink to new
lows and the elderly population explodes.
In the 1990s, the
CPPIB began to diversify its holdings, moving into equities, public
properties then private spaces. Before then, the fund only invested in
government bonds.
Today, the CPPIB generally operates with the
rationale that the right mix of private assets can perform better than
public ones in the long run.
The Canada
Pension Plan is a partially funded plan. Contributions are expected to exceed
annual benefits paid through to 2021 and there is no need to use
current income to pay benefits for another 11 years.
Why is this
important? Because unlike fully funded plans, it's investment process
doesn't center around matching assets with liabilities. CPPIB can take
on more long-term risk in illiquid assets if it feels there are
compelling reasons to be investing in these assets.
Go back to
read David Denison's speech on what
it means to be a Long-Term Investor. I quote:
My
last precondition for acting as a long-term investor perhaps states the
obvious, and that is that your investment process actually has to
incorporate long horizon valuation factors.As obvious as this may sound, relatively few
investment processes actually operate this way. In addition to the
points already noted, another simple reason is that investment managers
who are measured, rewarded, and can be hired/fired over increasingly
short periods are not likely to build investment processes that identify
valuation anomalies that may take 5 years to materialize.In
practice it means that those managers aren’t likely to buy real estate
in a falling market with the expectation that they will have to mark it
down in the near term even though its risk adjusted returns over a
ten-year timeframe may be compelling – it’s also worth pointing out of
course that those real estate assets are not necessarily for sale when
times are good.It means
investors won’t likely defer receipt of current dividends from an
infrastructure asset for example in order to instead re-invest to
improve the efficiency or capacity of the asset to generate future
returns. And it means that such managers are not likely to invest
resources into researching and identifying long horizon factor models
that are different from most standard investment programs.
Another
reason why CPPIB and other Canadian pension funds are snapping up real
estate and infrastructure assets? Look at the appreciation of the
Canadian dollar over the last year (chart above versus USD but CAD has
also appreciated versus the Euro). The strong CAD makes these foreign
assets a lot cheaper, allowing these mega funds to snap up assets on the
cheap using a strong commodity currency.
But there are other
reasons why large Canadian funds are investing in infrastructure. In the
last six years, infrastructure has become a hot asset
class, appealing to long-term investors looking to match duration
of their long-term liabilities with high quality assets providing steady
cash flows. Also, the effects of the liquidity crisis have been minimal
on infrastructure assets.
Finally, despite its attraction,
infrastructure does carry risks, but it can also serve to mitigate
portfolio risk. In late May, Samuel Sender, senior researcher at
Edhec-Risk Institute, wrote an excellent op-ed in the FT, Pensions
falling short on risk management:
News of
huge pension deficits and closures of defined benefit pension funds
suggest that risk
management by pension funds may not be entirely up to scratch. To
examine the issue of risk management practices, Edhec-Risk Institute
recently surveyed pension funds, their advisers, regulators and fund
managers.
An initial finding of the survey, conducted as part of
the Axa Investment Managers research chair at Edhec-Risk Institute, is
that most of the 129 respondents have a restrictive view of the risks
they face. Prudential risk (the risk of underfunding) is managed by
only 40 per cent of respondents; accounting risk (the volatility from
the pension fund in the accounts of the sponsor) by 31 per cent; and
sponsor risk (the risk of a bankrupt sponsor leaving a pension fund
with deficits) by less than 50 per cent.
A primary challenge
for a pension fund is to meet its liabilities by hedging the liability
risk away, usually with what is known as a liability-hedging portfolio,
the portfolio that best replicates liabilities. Pension funds
generally hedge their interest rate and inflation risks. Since it is
mandatory in the UK to index pension payments to inflation, British
pension funds are more likely to use inflation-linked bonds (64 per
cent of respondents from the UK have more than 20 per cent of their
liability-hedging portfolio in inflation-linked securities).
However, the excessive demand for
inflation-linked securities may lead to poor returns on inflation-linked
bonds, making the liability-hedging portfolio expensive. For that
reason, pension funds may seek to replicate liabilities with assets that
can provide better returns, such as real assets. On the other hand,
our survey suggests 45 per cent of pension funds do not fully model the
liability-hedging portfolio at all. This turns out to be logical in
that 46 per cent of respondents use optimisation techniques to achieve
the best risk/return trade-off.
A second challenge for pension
funds is to achieve positive returns.
This can be done through a
performance-seeking portfolio that diversifies market risk in an
optimal manner by using a mix of asset classes and an appropriate
benchmark for each asset class (we find that 81 per cent of pension
stakeholders use sub-optimal market indices as benchmarks for their
investment funds).
Equities account
on average for 32 per cent of the performance-seeking portfolio, a
share that is much larger than that of potentially illiquid assets
(hedge funds, private equity, and infrastructure), even though pension
funds, as long-term investors with no need to worry about short-term
liquidity, are in a good position to invest in these assets and take on
liquidity risk.
Pension funds should manage their minimum
funding requirements by insuring risks away.
Risk-controlled strategies, which insure against a fall in
funding ratios below the required minimum, make it possible to forgo
some of the upside potential of the performance-seeking portfolio in
exchange for downside protection.Curiously,
50 per cent of pension funds are fully aware of these strategies, but
only 30 per cent use them.
Economic capital management (seeking
to ensure funding ratios always remain above a minimum level) relies on
a risk budget and a surplus, but it involves a discretionary
investment strategy and possible delays in implementation. Since the
use of economic capital means a liability-hedging portfolio (the
risk-free portfolio in an asset-liability management setting) does not
need to be set up, pension funds may find themselves unable to switch
their investments quickly to this risk-free portfolio.
Unlike
this discretionary approach, applying risk-controlled strategies to
economic capital creates what might be called rule-based economic
capital, a strategy that would compel pension funds to manage economic
capital with less discretion and greater adherence to pre-defined
rules. After all, simple rules similar to those of constant proportion
portfolio insurance ensure that risks are covered.
Finally, pension funds generally do not
assess the adequacy of their asset-liability management strategies or
fail to do so with appropriate metrics: 30 per cent of respondents do
not assess the design of the performance-seeking portfolio, and more
than 50 per cent use relatively crude outperformance measures.
These
shortcomings may mean that less than optimal decisions are made on an
ongoing basis.
Less optimal decisions are made on
an ongoing basis, but Canadian pension funds are taking a more global
approach to mitigating risk. The recent overseas buying spree by
Canada's largest pension funds may indeed prove to be a wise decision,
but infrastructure assets aren't a panacea, and they do carry important
risks. We shall see if these long-term investments deliver on what
investors expect from them.
»
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Our housing and Commercial real estate bubble will not pop until interest rates go up.
So to put it another way, Canadas house prices will fall when the US has a bad bond auction.
That is why Mish is so fucking stupid to be bearish on Canada because of the house prices and bullish on the US dollar. What will fuck the Canadas housing bubble is the same thing that will fuck the US dollar.
No, the bubble will pop when the first guy hears the fire alarms in the burning theater. You're too busy/distracted by the entertainment.
Hopefully, the Canadians will buy things with actual utility and value. I have never understood why the Chinese, unable even to feed and water their populace, persist in buying useless US paper assets, instead of things like Canadian oilsands and Argentinian farmland.
I suppose they have some dim hope of being able to restart the great Bretton-Woods 2.0 merry-go-round. I can already tell them what the outcome of that wager will be.
Much of the world is in the middle of a deflationary collapse all the meanwhile fund managers are out trying to ramp up returns with risky assets. I guess if they can say they lost only 20% of their assets while the industry lost 25% they consider themselves winners.
What is it with these Canadian banks and pension funds? They could fall in a shithouse and come out smelling like a rose.
Thats because Canadas housing bubble is contained in a more traditional banking system. This bubble can only deflate the traditional way, with higher interest rates.
Thats because Canadas housing bubble is contained in a more traditional banking system. This bubble can only deflate the traditional way, with higher interest rates.
May I suggest the Canadians purchase Chinese solar stocks.....?
Hey Leo, we've got a lot of commercial real estate Canada could buy! Buy on the dips you canucks!
"infrastructure assets"
Yeah... those are only profitable when you don't include maintenance costs.
Canadian pension fund is also managing .... internet casino 888.com and ..... homeland security of USA:
First, homeland security of USA is *outsourced* to Israel company called NICE:
nice.com.
Customers:
http://nice.com/about/corporate_overview.php
Enterprise Sector
* American Express
* JP Morgan
* Federal Express
* Ford
* Time Warner
* CITI Group
* T-Mobile
Public Sector
* New York City MTA
* Los Angeles Police Department (LAPD)
* Federal Aviation Authority (FAA)
* Federal Communications Commission (FCC)
* Dallas-Fort Worth Airport (DFW)
* Eiffel Tower
* European Space Agency (ESA)
Not fun yet?
Ok.
NICE itself *outsourced* part of *monitoring* of US and European security systems to *ukranian* company called Aricent.
Aricent.com
Aricent is an India-Ukraine-based company, owned by ... a royal family of Bahrein and ..... Canadian pension fund.
Not fun yet?
Ok.
The same people in Aricent, managing "security monitoring" in Ukraine ....... (are You ready?) .... manage ... largest internet-CASINO called 888.com(!).
Do you understand? The same young students-semi-hackers on literally same servers in Ukraine are rolling both "homeland security of USA" and ... Gibraltar-based-Israel-owned internet-casino.
A gamble is a gamble.