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PSP's Annual Public Meeting 2010

Leo Kolivakis's picture




 

Via Pension Pulse.

PSP Investments' second Annual Public Meeting was held on October 28, 2010. You can consult the website's Annual Public Meetings section to download presentations and listen to audio recordings of the proceedings.

Let's first go over some sections of the speaking notes of Paul Cantor, Chair of the Board of Directors:

As
I observed in the 2010 Annual Report, the first 10 years of PSP
Investments were challenging times. According to the Wall Street
Journal, the first decade of the 21st century turned out to be the worst
ever for US stocks based on records going back to the 1830s. Total
returns for the period 2000-2009 amounted to negative 0.5%. That
compared with a high of 18% in the 1950s and was even lower than the
negative 0.2% return for the 1930s Depression era.

 

In short, it proved to be an inopportune time to launch a new fund.
Nevertheless, PSP Investments has grown into a robust, highly
diversified fund that will soon rank among the largest pension
investment managers in Canada and internationally. Assets under
management now exceed $50 billion and the organization has more than 330
employees. PSP Investments has investments on every continent north of
Antarctica.

Very
true, the timing of this fund couldn't have been worse, but a decision
was made to diversify away from non-marketable government bonds and over
the long-run, this is the wise thing to do. As Mr. Cantor states
further down:

The
fundamental premise of the Board is that PSP Investments cannot achieve
its desired objective for long-term returns of 4.3% — plus inflation —
by investing in bonds. We can only achieve that by investing in other
securities as well, such as equities. Of course, as events of the past
two years underscored, markets are cyclical.

 

History
has shown us that short-term volatility has always been part of equity
investing. History has also shown us, however, that in the very long run
markets have gone up more than they have gone down and that stocks have
outperformed other asset classes over the long-term.

A
note of caution here. Relying too much on history can be problematic
given the structural nature of today's market and the unprecedented
economic uncertainty that may loom for a prolonged period as developed
nations struggle with the burden of debt. Moreover, as was mentioned a
few days ago on the retirement disaster that lies ahead, even if you diversify away into stocks and alternative investments, investors will be lucky to achieve a real return of 2.1%.

Mr. Cantor goes on to state:

Thus
it is important to not lose courage and sell when the markets decline;
because chances are we would not be there in time to catch the wave when
they rebound.

 

On that note, I am pleased to observe
today that our patience has been rewarded: during fiscal year 2010, a
substantial portion of unrealized losses from the downturn in the
previous year was recovered. As at our March 31st year-end, PSP’s
consolidated net assets had increased 37% to a new high of $46.3 billion
and we earned a total portfolio return of 21.5%. In recent months, we
passed the $50-billion mark in assets.

 

Those results
underscore the solid long-term value of PSP Investment’s assets and also
reflect initiatives taken to benefit from the market turnaround.

PSP
enjoys an enviable liquidity advantage in that it does not have to pay
out benefits for several more years. What that means is that unlike
other pension funds, they weren't forced to sell stocks at the bottom
to shore up liquidity. Deep pockets means you can keep buying the dips
and sit tight waiting for markets to eventually turn around.

Mr. Cantor also spoke of reviewing PSP's Policy Portfolio:

Over
the past few months we have undertaken a comprehensive review of the
Policy Portfolio to ensure that it remains effective in delivering the
expected returns. This review was enhanced by a significant
strengthening of our ability to review the liability structure of our
Funds and to link those with our asset allocation strategy.

 

The
current Policy Portfolio has remained essentially constant since fiscal
year 2006, when the last full review was performed. It reflects the
diversification strategy initiated in fiscal year 2004 with the
introduction of private asset classes — real estate in 2004, followed by
private equity in fiscal year 2005 and infrastructure in 2006 — as well
as the addition of the small-cap and emerging markets equity asset
classes in fiscal year 2005.

 

The review takes into
account the most recent expectations of long-term market conditions
developed by PSP’s Economics and Market Strategy group. However, it is
not only the market risks and volatility of returns that are being
assessed.

 

The review also
looked at another crucial consideration — the funding risk, that is the
impact of the volatility of investment returns on the probability that a
funding deficit will occur and on the stability of funding
requirements.

 

Simply put, we want to ascertain that
any funding deficit or changes in funding requirements as a result of
investment returns would remain — under normal circumstances — within an
acceptable range, while recognizing that we need to take on risks to
achieve the real return objective.

Here
too I will caution Mr. Cantor and the board of directors at PSP. Given
that PSP is a fully funded plan, funding risks must be taken into
account when constructing a Policy Portfolio. But the construction of a
Policy Portfolio is tricky, especially nowadays.

My recent discussion with Leo de Bever
highlighted some of the concerns that all pension funds are struggling
with right now. Mr. de Bever isn't convinced that you can identify top
quartile asset managers a priori and he feels that the shift into
alternative investments will bring down the expected returns in illiquid
asset classes as they become more "efficient".

Importantly,
when reviewing your Policy Portfolio in this environment, you need to
bear in mind what your peers are also doing. As silly as that sounds,
it's crucial or else you risk overestimating the expected returns on an
asset class. You also need to understand the long-term structural
changes that are going to take place over the next decades. This is
anyone's best guess, but a critical qualitative assessment is needed,
and don't make the mistake of relying on quantitative analysis based on
historical data.

Gordon Fyfe, President & CEO, presented PSP's fiscal 2010 results. The entire presentation and the accompanying audio
are worth going over and listening to carefully. Some of the key themes
covered were PSP's diversification (see chart above) and the move to
bring assets internally. In fact, as shown on the chart below from
page 12, more assets are managed internally and a great proportion of
active management is internal.

The
savings of such a move are significant. According to Mr. Fyfe, external
active management is 3.5 to 7 times more expensive and outsourcing all
assets to fund managers would cost approximately $140 million more per
year.

In terms of returns, it was interesting to note
that the top five private investments accounted for a significant
portion of value added in fiscal 2010:

Another interesting thing I caught on audio was that 2
deals - Telesat and China Network Systems accounted for the bulk of the
gains in private equity. Mr. Fyfe said the PE team reviewed many deals
but only chose a select few for direct investments.

Finally, there is a big push to go into emerging markets
- both in public and private markets. PSP's performance in the first
six months of fiscal 2011 is 5%, but that doesn't include the
performance of private markets which are valued once a year at the end
of the fiscal year.

All
in all, I thought this was a good presentation. Would have liked to
have seen a discussion on benchmarks and compensation, but they steered
clear of those issues. Also, it was surprising that nobody bothered
asking any questions during the Q & A and that once again this year,
no media covered PSP's annual meeting (no excuses, the media had ample
warning time to do so as the announcement was posted on PSP's site for a
few weeks). Once again, PSP is flying under the radar, which suits Mr.
Fyfe and his senior management team fine. They prefer delivering the
results and staying out of the limelight.

 

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Sun, 10/31/2010 - 21:01 | 689660 huntergvl
huntergvl's picture

Why do I care about this fund?

Negative returns in '02, '03, then catch up in '04, '05, '06, and '07, then negative again in '08 and '09? Finally positive in '10? How exactly is this an advantage over just about every index fund this decade?

I am sick and tired of reading info and advice from funds that had major negative returns in '08 and '09. If I wanted returns from management like this, I would just turn to Bill at Legg Mason. These guys made money when the entire market was up and lost money when the entire market was down. What's the allure, here?

They are once more positioned to have average positive returns if the false rally of '10 continues and will get absolutely hammered if the market corrects.

 

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