Thursday, May 24, 2018

Canada's Public Service Pension Problem?

Frederick Vettese, partner of Morneau Shepell and author of “Retirement Income for Life: Getting More without Saving More”, wrote a special for the Globe and Mail, When it comes to pensions, don’t follow Ottawa’s example:
It is a sad fact that only 20 per cent of private-sector workers are covered by pension plans in their workplace. In stark contrast, nearly 100 per cent of public-sector workers are covered. Of course, none of this is news; pension envy among private-sector workers is as Canadian as hockey and Timbits.

What is perhaps more interesting and less well understood is the garbled message the government is sending with the pension programs it provides to its own employees. I will single out the federal Public Service Pension Plan (PSPP), not only because it has more than half a million members, or because it is generous even by public-sector standards, but also because the federal government has the power to effect change in a way that would benefit millions of Canadians.

The classic defence of plans such as the PSPP is that everyone benefits when civil servants can retire in dignity. Besides the obvious advantages for the participants themselves, good government-sponsored pension plans create a benchmark for other employers to emulate.

In the case of the federal government, however, this rationale contains a fatal flaw. The last thing the federal government would ever want is for all private-sector employers to adopt pension plans like the PSPP. The consequences would be disastrous for both the Canadian labour force and for tax revenues.

Consider the labour force first. At present, we have about four workers for every retiree. Fifty years ago, that ratio was 6.6 to 1 and in another 20 years it is forecast to dwindle to just 2.3 to 1. Barring a robotic revolution, we will probably not have enough workers to keep the economy running.

Don’t count on immigration to make up for the looming shortage of workers. It is already running at the highest rate in a century (with the exception of 1956, when the Hungarian refugee crisis occurred); the general public is unlikely to want to see immigration rise much more, even if we had the infrastructure to support it.

A higher birth rate is another possible way to change the worker-to-retiree ratio, but it is not clear what, if anything, would cause the birth rate to rise any time soon. Besides, the impact on the worker-to-retiree ratio would be negligible for at least 30 years.

The inescapable conclusion is that the only viable way to ensure there will be enough workers in the future is to encourage people to keep working longer. Alas, the federal PSPP does just the opposite. The plan’s retirement rules incentivize long-term civil servants to retire as early as age 50. If private-sector employers had maintained similar pension plans all along, the labour force today would have roughly one million fewer workers.

The effect on income-tax revenues if everyone had a PSPP-like pension plan would be equally damaging. A C.D. Howe paper by Malcolm Hamilton estimates that the average Canadian worker contributes about 14.1 per cent of pay toward retirement. (This includes employee and employer contributions to registered retirement savings plans and pension plans but not tax-free savings accounts.) In the case of federal public-sector workers, the contribution rate could exceed 25 per cent in a year when the PSSP has a big deficit. If private-sector workers (and their employers) made tax-deductible contributions at that rate, overall tax revenues would drop by more than $15-billion a year. Clearly, the federal government would never allow this to happen.

The time has, therefore, come to change the federal PSPP to better reflect the public interest. (Or actually, to change it further. Some amendments were made during the Harper era though they did not go nearly far enough.) The plan is a relic from an era during which the country had more potential workers than the economy could absorb but this is no longer the case.

So what should the federal government do to set a good example for private-sector employers? First, it should remove all incentives within the PSPP to retire early. Employees could still retire early, of course, but with the same penalty that applies to all participants in the Canada Pension Plan. Retiring early in comfort may require them to save a little extra in an RRSP and/or a TFSA, the same as what most other Canadians already do.

Second, it should reduce total employee and employer contributions under the PSPP to 18 per cent of pay, including any deficit payments that may have to be made in the future. Even at 18 per cent, the amounts being contributed by, and on behalf of, federal civil servants would still be at the high end of the spectrum.

Of course, these recommendations will not go over well with all stakeholders. No doubt the public-sector unions would strenuously defend the status quo on the basis that PSPP members contribute a high percentage of pay and should be entitled to a generous pension benefit in return. On this point, I would note that over the 12-year period from 2006 to 2017, PSPP contributions by members constituted barely one-third of total contributions (37 per cent to be exact). In most large public-sector plans, member contributions fund 50 per cent of the total pension cost and that includes the cost of paying off any plan deficits that may arise. It is time the federal PSPP fell into line.

The effect of the suggested changes would not be felt immediately since new retirement rules can be applied only to future service. They are, nevertheless, important if the federal government truly wants to set a good pension example for the rest of the country.
I shared this article with two of Canada's best actuaries, Bernard Dussault, Canada's former Chief Actuary, and Malcolm Hamilton, a retired actuary who worked many years as a partner at Mercer and now writes policy papers for the C.D. Howe Institute.

Not surprisingly, Malcolm agreed with the author:
I agree that the federal PSPP is, from the taxpayers' perspective, a disgrace and that something should be done about it.

My description of the problem, and how best to solve it, is quite different.
Bernard provided a little more analysis and questioned the author's claims:
This article fails to point out that the federal government already took measures a few years ago to address the unduly rising cost of the Pension Plan for the Public Service of Canada (PPPSC) mainly by increasing the pensionable age from 60 to 65 for members hired after 2012.

As can be seen in Table 4 on page 9 of the actuarial report on the Pension Plan for the Public Service of Canada (PPPSC) as at March 31, 2014 (http://www.osfi-bsif.gc.ca/Eng/Docs/PSSA2014.pdf), its current service cost is about 17.5% of payroll for the post-2012 hires, shared equally by the members and the government (employer), which is appreciably lower that the about 20.7% cost for pre-2013 hires. This favourably happens to fall below the prescribed fiscal 18% limit above which pension contributions are immediately subject to income taxes.

In other words, the government pays less than 9% of payroll for the post-2012 hires' pensions, which in my view is reasonable considering the important role that pension plans play for the alleviation of seniors' poverty.
Malcolm then followed up to state the following:
I think that you need to add a couple of things.

First, Bernard's description of the changes to the PSPP is quite misleading. Many members hired after 2012, specifically those hired under the age of 30, will be able to retire at the age of 60, not 65 as Bernard contends.

More importantly, only 50% of the cost of the PSPP is covered by contributions. The other 50% is covered by risk-taking. Since taxpayers bear all of this risk, they end up paying much more than Bernard suggests. For this, we can thank defective public sector accounting standards, which allow governments to claim, as does Bernard, that pension plans costing 40% of pay really cost 20% of pay.

In private sector financial statements, this would simply not be tolerated.
I thank Malcolm and Bernard for sharing their insights with me on this article.

I actually agree with both of them to a certain extent but let me explain. Like the author, Fred Vettese, Malcolm paints an overly dire portrait of the federal Public Service Pension Plan (PSPP).

For his part, Bernard points out facts which contradict the author's claims but he too doesn't address some issues which the author is right to point out and as such, is overly optimistic in his assessment.

In my opinion, the most important point that Fred Vettese addresses is the demographic shift going on in Canada (and elsewhere) where in a few years, we will have more retirees than active workers.

You know where I'm getting at with this? That's right, I want to see the federal Public Service Pension Plan (PSPP) adopt a shared-risk model which forces intergenerational equity.

In particular, I want to see conditional inflation protection adopted so if the plan experiences a deficit, retired members will experience a cut in inflation protection for some time until the plan is fully funded again.

In fact, conditional inflation protection is a critical factor behind HOOPP and OTPP's success and that of other fully funded plans in Canada.

It's mind-boggling that in 2018 we still have public sector unions demanding guaranteed inflation protection as if the rest of society owes it to them no matter what.

I'm sorry, I'm an ardent defender of defined-benefit plans but I absolutely need to see two key elements: 1) world-class governance and 2) a shared-risk model where if needed, contributions are raised, benefits cut (typically for a short time using conditional inflation protection) and/ or both.

We need to defend DB pensions but we also need to make them fairer and more sustainable over the long run.

One thing the article above doesn't address because it's a bit confusing is PSP Investments was incorporated as a Crown corporation under the Public Sector Pension Investment Board Act in 1999 to fund retirement benefits under the Plans for service after April 1, 2000, for the Public Service, Canadian Armed Forces, Royal Canadian Mounted Police, and after March 1, 2007, for the Reserve Force.

Notice it's focused on the funding needs of the Plans for service after April 1, 2000, and doing a great job providing an annualized return well above the required actuarial return set by the Chief Actuary of Canada. You can see PSP's fast facts on the Public Service Pension Plan here.

What about the funding needs of the Plans before April 1, 2000? Thus far, PSP hasn't had to worry about those, they are debt which is funded from the federal government's General Account but if they were all of a sudden responsible to fund those retirement benefits, it would be a big deal for the organization and put additional pressure on it because those Plans are in a deficit.

In my opinion, PSP should be responsible for funding pre-April 2000 Plans as well and this too would be fairer for taxpayers, not to mention better for all stakeholders.

I don't want to get into too much detail here but it's a big issue which is currently being discussed in Ottawa (it's been discussed for what seems far too long).

Lastly, I remind all of you that municipal and provincial debt isn't factored into total debt in Canada much like state and local debt are not included in the US federal balance sheet:



I mention this because I had a conversation with a friend of mine in Ontario who was asking me if the Ontario Government uses the pension surpluses to pad that province's balance sheet and I said: "of course it does". He then asked me if the Ontario Government can use those surpluses to spend on programs and I said: "of course not".

He also asked me why they're not amalgamating all these provincial public pensions (including HOOPP which is private) so the province can save costs. I told him it's never going to happen and there would be huge pushback if it did.

I leave you on this note, Canada's pension problems are a joke compared to what is going on in the United States.

Below, Thad Calabrese, NYU, and Kuyler Crocker, Tulare County Board of Supervisors, discuss why cities are investing in the market through the issuance of pension bonds.

Listen carefully to this discussion and especially listen to what professor Calabrese states on these pension bonds, he's spot on but he too neglects mention the real problem behind state and local pension deficits: years of neglect/ mismanagement, poor governance and no shared risk model.

Wednesday, May 23, 2018

Are Smaller Hedge Funds Worth It?

Thomas Franck of CNBC reports, If you want to run a hedge fund that beats the market, keep it small:
Successful hedge fund managers should do something unusual if they want to stay that way: Say no to new investors.

The bigger a hedge fund gets, the worst it tends to perform, according to a new academic study.

Holding other features constant, a 10 percent increase in fund size results­­­ in a decrease of 13 basis points per month (or 1.53 percent per year) in raw returns on average and a decrease of 10 basis points per month (or 1.21 percent per year) in style-adjusted returns, according to the paper from Purdue University.

"A key implication of our findings for investors is that performance persistence is achievable when funds maintain a small size," researchers Chao Gao, Tim Haight and Chengdong Yin wrote. "Fund performance declines with fund age and that declining performance is not significantly related to a variety of fund and family-level characteristics, nor is it significantly related to young funds assuming higher downside risk."

The paper clarifies prior literature that found that hedge fund performance peaks during the first few years of a fund's life, but declines thereafter at an average rate of 42 basis points per year.

The decline in performance, according to the Purdue researchers, appears to be due to managers taking their eye of the ball and focusing more on asset gathering (and the steady fees that come with them) rather than investing.

Other studies hold that historical compensation contracts in the hedge fund industry, such as 2 percent management and 20 percent performance fees, is not effective at aligning managers' incentives with investors' interests.

Yin's 2016 study, for example, demonstrates that the management fee comprises a larger portion of total compensation when funds grow large and thus a fund's optimal size, from a compensation perspective, exceeds the size that is optimal for performance.

The research comes amid an ongoing move by funds to offer more competitive fee structures amid lackluster performance, declining revenues and rapidly evaporating investor patience.

"When funds grow large, fund managers may have less incentive to improve fund performance because most of their compensation comes from the asset-based management fee," the researchers concluded. "Thus, investing in small funds, regardless of age, may provide for superior and sustainable returns."
Ah, the old large versus small hedge fund debate. A few years ago, Barron's had a similar comment on how small hedge funds outperform bigger rivals but CNBC then responded by stating bigger is better.

Let me cut to the chase and give you my quick takeaways:
  • No doubt, smaller hedge funds that survive their first year in operation are by definition hungrier for performance and much more focused on performance. Why? Because in order to survive, they need to perform and raise their assets under management to a decent level over the first three years.
  • What is the critical threshold for assets under management? It depends on the strategy but some say it's $300 million, some $500 million and some over $1 billion to survive and deal with all the regulatory, compliance and institutional demands.
  • Large hedge funds are able to address all these demands. They also have a lot of money to pay their people well which allows them to attract the best talent. So, it's not true that all large hedge funds are lazy asset gatherers who stopped focusing on performance. Many are but there are plenty very much still focused on performance and if they weren't, they'd be out of business
  • I can also tell you there are A LOT of crappy small funds which is why most investors don't bother with them, preferring to focus on the 'best of breed' large funds which are scalable and offer them peace of mind (if they blow up, less career risk since other large institutions also invested in them).  
Anyway, I had lunch with Andrew Claerhout, the former head of Infrastructure and Natural Resources at Ontario Teachers' Pension Plan and Greg Doyle, Vice-President of Pension Investments at Kruger.

It was actually the second day in a row I met up with Andrew for lunch and it was a pleasure meeting him in person in Montreal where he was visiting for a couple of days.

I've said this before and I'll say it again, Teachers' screwed up big time letting go of such outstanding talent. Andrew should have been the next CEO of Ontario Teachers', he's very intelligent, super nice and an outstanding leader (following his departure, the CIO "resigned" and there were a couple of senior managing directors that left Teachers' Private Capital to start their own PE fund).

Anyway, Andrew, Greg and I had a great lunch, we enjoyed the nice weather and I enjoyed listening to them talk private equity, infrastructure, renewable energy and more. Greg was especially chatty and he's a bright guy, reminds me a lot of Mike Keenan over at Bimcor (BCE's pension plan).

Andrew really knows his stuff too, said there was a value creation plan behind every investment and "no investment was made unless we figured out a way to improve operations and unlock value".

Honestly, the guy should write a book or a guest blog comment because he spent 13 years at Ontario Teachers' first working in private equity (Mark Wiseman hired him) and then heading up infrastructure and natural resources over the last four years. He's seen a lot and he's no passive investor, he enjoys getting into the operational weeds.

We talked about the climate for fundraising. Earlier today, I sent Andrew a Bloomberg article on how Carlyle's co-founder David Rubenstein sees more money flowing into private equity than at any time in his three-decade career.

Rubenstein is a master at raising funds. Greg Doyle has met him (and plenty of other big shots) but he remembers him saying: "It takes six months to launch an IPO and 18 months on average to raise money and close a private equity fund."

You see, even in private equity, the fundraising might be great for the large, well-known funds, but it's no cake walk and it's brutal for smaller funds, many of which are struggling to survive.

Still, just like in hedge funds, there are some excellent small or medium-sized private equity funds (I can think of one excellent medium-sized PE fund in Canada, Searchlight Capital, founded by Erol Uzumeri who used to work at Teachers' Private Capital, Eric Zinderhofer from Apollo and Oliver Harmann from KKR).

Many institutional investors love private equity, it's their best asset class and they like it even if it's illiquid because the alignment of interests are there and so is long-term performance.

My last comment was all about how CalPERS is bringing private equity in-house, trying to emulate what Canada's large pensions are doing through fund investments and co-investments on larger transactions (a form of direct investing which lowers overall fees but it’s not pure direct investing).

Anyway, today I wanted to talk about hedge funds, especially smaller hedge funds.

There are some talented absolute return managers in Canada that are run by excellent managers but for one reason or another, they don't make it on consultants' lists of funds to invest in.

I hate the cookie-cutter approach where you need to check off all the boxes and think it's really worth  meeting managers one by one to understand their strategy, performance and people.

For example, in Montreal, I've already referred to the folks at Crystalline Management, one of the oldest hedge funds in the country which will soon celebrate its 20-year anniversary. Marc Amirault and his team have done a great job running a couple of arbitrage strategies and they have grown their assets very carefully (I think they're way too conservative and have told them so but it's what they're comfortable with).

But there are other emerging managers, some that received mandates from PGEQ. Quite frankly, the biggest problem in Quebec and rest of Canada is we lack a billionaire Bass family like they have in Texas to fund new private equity and hedge funds on a much larger scale.

We desperately need big billionaires with big cojones writing big seed tickets. I'm dead serious about this. The PGEQ is fine but we need something much, much bigger, preferably backed by large family offices since big pension funds aren't into taking big seed risks.

[Note: In March, CPPIB announced it made initial investments of as much as $250 million each in five startups and young hedge funds under its Emerging Managers Program in the past two years. None of these fledgling hedge funds are Canadian. Read details here.]

I see guys like Karl Gauvin and Paul Turcotte at OpenMind Capital trying to get assets under management and offering institutional quality volatility funds. Go see them, kick the tires, talk to them and you'll see they know what they're talking about.

But there are other less well-known players, slowly gathering assets under management, people I've worked with in the past. One of them is Francois Laplante who runs Folco Strategy Partners and is posting outstanding absolute return numbers.

I know Francois from my days at the National Bank going back almost 20 years. He and Philippe Couture were the only traders who survived and are still trading for a living (Philippe trades his own money and doesn't want to manage outside money).

Francois runs a segregated account using Interactive Brokers platform and charges low fees (1.25% management fee and 10% carry) because his costs are low. It's fully transparent, the client owns the account and can get out at any time, and he can run all the trades pari passu through this structure (by the way, OpenMind uses the same IB structure and also charges low fees).

I had lunch with him a couple of weeks ago and asked him to give me a brief description of his strategy/ edge:
Folco Strategy Partners equity long/short seeks to generate annual returns of 10% (net of fees) with a risk target lower than equity markets. We have a contrarian approach and we
focus on REITs and other defensive real asset industries such as renewable energy, rails, energy infrastructures, independent power producers, pipelines, utilities and telcos. The strategy offers a very low correlation to the equity market.

Our unique proprietary top-down and bottom-up investment process uses a combination of fundamental and technical analysis.

We focus on our sectors of expertise and remain disciplined at all times. We believe publicly-traded real asset sectors are occasionally mispriced, and we use these opportunities to our advantage.

We may invest or short securities in other sectors to seize opportunities or minimize downside risk (maximum 20% of AUM). We establish our geographic and segment exposures based on regional growth perspectives, currency impact and supply/demand dynamics The manager has a significant personal investment in the strategy. I am the biggest investor.
I highly suggest you contact him at  Folco Strategy Partners and do your own due diligence. A guy who has traded this long and in size (he ran big ALM desk at Desjardins) really knows his stuff and he's posting incredible numbers (a couple of investors I brought to him didn't believe it but one was so impressed, he already invested with him after visiting his office and kicking the tires).

All this to say, everyone loves big hedge funds, I too track what top funds are buying and selling every quarter, but it's worth keeping your eyes and ears open for smaller hedge funds that aren't brand names but often (not always) offer much better returns and alignment of interests.

In my humble opinion, the best investors positioned to invest in smaller hedge funds are large family offices who aren't afraid to take some smart risks.

Large pension funds can also seed smaller hedge funds through a fund of funds structure or some other structure (like PGEQ) but they move at a very slow pace and there just not interested in allocating risk to such a venture and when they do, it moves at glacial speed.

Let's face it, big pensions looking for scale want to write big tickets to a few big players. That will never change but maybe they need to rethink their approach and allocate some risk to smaller hedge funds.

Below, CNBC's Leslie Picker reports that hedge funds are raking in the money. The big hedge funds are getting bigger but this leads to crowded trades which is why returns are dwindling over time.

Update: Charles Lemay, Vice-President Business Development at Landry Investment Management, shared this with me after reading this comment (added emphasis is mine):
Great article Leo, 100% agree. When interests are aligned and the PM/employees have skin in the game...motivation to perform and succeed is much higher. You find this much more often in smaller shops vs larger ones who have “made it” and can afford to pay the bigger salaries so the PMs/employees get complacent. It’s not always true but like Vital Proulx said at the EMB event a couple weeks ago...graduating from being an emerging manager to above a billion is one thing...you have a sustainable business now...but keeping that drive and motivation to keep performing and growing to your “sweet spot” AUM for you strategy is very important. We need more stories like Hexavest (like your billionaire Bass family) who made it from nothing to $20B and have kept the engine going. Vital doesn’t need to work...but his passion is there, he loves what he does and wants to keep going. And yes PGEQ needs to get bigger...much bigger.
I thank Charles for send me this and agree with Vital Proulx's wise advice, no matter how big you get, you need to keep the drive and motivation alive and that's been the secret behind Hexavest's success.

And just so you know, Hexavest recently announced it hired Vincent Deslisle as the co-CIO to help Vital and Jean-Pierre Couture, the Chief Economist. Good move, Vincent has a lot of passion for investment research and he's a very nice guy too.

Tuesday, May 22, 2018

CalPERS Bringing Private Equity In-house?

Mark Anderson of the Sacramento Business Journal reports, CalPERS bringing private equity in-house:
The California Public Employees’ Retirement System has said it will create a separate entity to make direct private equity investments.

Last week, the $349 billion Sacramento-based pension fund unveiled what it will call CalPERS Direct. Poised to launch in the first half of next year, CalPERS Direct will consist of two funds. One will focus on late-stage investments in technology, life sciences and health care, and the other fund will focus on long-term investments in established companies, CalPERS said in a news release. The pension fund plans to invest about $13 billion a year in private equity deals, with a goal of having 10 percent of its investment portfolio in private equity.

“Our investment team has spent months exploring options in order to design an approach to private equity that takes advantage of our size and brand,” CalPERS chief investment officer Ted Eliopoulos said in a news release. “We believe it will drive stronger private equity returns and help achieve economies of scale over time.”

CalPERS' move to create its own private equity investment vehicle is the latest step in its transition away from hiring outside money managers, as the pension fund looks to cut down its expenses on commissions and fees. CalPERS has already internalized 75 percent of its asset management, with most of that invested in publicly traded assets, Eliopoulos said in an interview on Bloomberg Television.

CalPERS Direct will be governed by a separate, independent board, Eliopoulos said. That structure “allows us to access the talent we need to invest in the private marketplace,” he said on Bloomberg Television.

As a separate entity, CalPERS Direct will be able to pay high enough compensation to bring in top investment talent, Eliopoulos said. If the new private equity managers were CalPERS employees, they would have to be hired under state government pay scales.

Through external fund managers, CalPERS has been investing in private equity since the early 1990s. Over the past 20 years, it's been the pension fund’s highest-returning asset class, with a 10.6 percent annual return, according to CalPERS.
Joshua Franklin of Reuters also reports, CalPERS to build $13 bln in-house private equity funds:
The largest U.S. public pension fund plans to set up two funds managing up to $13 billion to invest directly in leveraged buyouts, it said on Thursday, underscoring how major investors are looking to lessen their dependency on private equity firms.

The decision by the California Public Employees’ Retirement System (CalPERS), which manages $349 billion, follows similar moves by Canadian funds to staff up on direct investment teams in an effort to save money in fees in private equity firms.

Investing directly by leading one’s own deals goes a step beyond what some large pension and sovereign wealth funds have done in recent years, which is to team up with private equity firms to co-invest in corporate takeovers.

“We believe it will drive stronger private equity returns and help achieve economies of scale over time,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement.

Private equity firms buy companies with the expectation of selling them a few years down the line for a profit. The industry pulled in a record amount of cash last year as investors turned to the asset class for public-market-beating returns.

However, larger money managers are keen to cut down on paying the fees demanded by firms, which typically collect a roughly 1.5 management fee and a 20 percent cut of any profits.

“The move by CalPERS is part of a broader trend amongst large institutional LPs, led by large Canadian pension, looking to disintermediate traditional fund managers to lower the cost of private equity and venture capital investment,” said James Gelfer, senior analyst at financial data firm PitchBook.

CalPERS Direct, which is expected to begin work in 2019 subject to final board approval and would only invest CalPERS money, would be made up of two funds. The first would target late-stage investments in technology, life sciences and healthcare, and the second on long-term investments in established companies.

CalPERS said its private equity program, which began in the early 1990s, has been the fund’s highest-returning asset class over the last two decades.

CalPERS in February said it lost 4.6 percent in value during the stock market’s tumble earlier this year, highlighting the appeal of private markets.
In related news, Arleen Jacobius of Pensions & Investments reports, CalPERS on lookout for emerging manager private equity fund-of-funds manager:
CalPERS is searching for a manager to run its private equity emerging manager program, said Megan White, spokeswoman for the $355.9 billion pension fund.

CalPERS launched the search in April in which it invited a targeted list of firms to compete, with responses due May 24. Incumbent Grosvenor Capital Management has been invited to rebid. Its contract expires in October. A hiring decision is expected in the fall.

Officials of the Sacramento-based California Public Employees' Retirement System have said they planned to commit up to $500 million in new capital to its private equity emerging manager fund-of-funds program between June 2016 when the plan was announced and 2020. CalPERS launched the program in 2012. Grosvenor manages $300 million.
As you can see, even though CalPERS' CIO Ted Eliopoulos is stepping down, the pension fund is busy beefing up its private equity portfolio.

No word yet on whether part of the private equity portfolio will be outsourced to BlackRock but something tells me a deal is imminent and Larry Fink is preparing for it.

Of course, the naked capitalism blog is busy criticizing CalPERS' every move, accusing the fund of issuing a false and misleading press release to try to railroad its board on a 'private equity enrichment scheme' and accusing the CIO  of five big lies on this super indirect private equity scheme.

Yves Smith loves the shock and awe approach in her blog comments. It's like she's trying to emulate Noami Klein every time she writes a post.

Alright, let me get to it. Yves is right on one point, this isn't direct private equity.  No Canadian or US pension fund is doing purely direct private equity deals on such a large scale. There have been some purely direct private equity deals in Canada but they are rare; the bulk of PE investments are still in funds and LPs co-invest with big private equity firms on some large transactions to lower overall fees or they bid on a portfolio company when the life of the fund ends.

Go back to read my comment on the Caisse going direct in private equity. I explain all this in great detail, don't have time to rehash it here. Yves Smith never bothered reading this comment carefully or else she wouldn't claim the Caisse "already does 2/3 of its private equity investing in-house and plans to go further in that direction. " (total rubbish!!!).

The important thing to remember is while there is a big push to lower fees in public and private markets, there is no US or Canadian pension fund competing with any of the large PE funds head on.

So get this notion of "direct private equity" out of your mind. It's never going to happen, ever, and it has nothing to do with the capabilities and competencies of the PE staff working at these pensions. The first phone calls on major private deals go to PE kingpins, not the heads of public pension funds.

The second thing I want to discuss is governance. Yes, it's true, this fund will have its own board but CalPERS is doing this for one simple reason Yves Smith fails to understand, there's too much politics at CalPERS limiting compensation at the fund. They need to create a separate entity with its own board to circumvent this and pay market rates for this PE fund.

I've said it before and I'll say it again, you pay people peanuts, you'll get mediocre results. If you want the Canadian pension model, you have to pay Canadian compensation or else forget it. you won't get the same results.

The important thing to remember is there is no way CalPERS can truly beef up its private equity portfolio or outsource part of it to whoever without creating this structure.

Stop reading garbage on naked capitalism. Sure, maybe CalPERS is trying too hard to spin this private equity venture and is exposing itself to some criticism but stop believing everything you read on naked capitalism. A lot of her assertions are laughable and full of it and fed to her by some CalPERS board members who have a hidden agenda.

Of course, it doesn't help that after questions raised about CalPERS CFO's background and experience, he's 'no longer with' the pension fund:
Charles Asubonten, whose background and experience came into question months after he was hired as the chief financial officer of CalPERS, is no longer with the giant pension fund, the organization acknowledged Monday.

The circumstances of Asubonten's departure from the CalPERS executive ranks are unclear. CalPERS made no announcement that he was leaving, but a spokesman acknowledged that he is "no longer with CalPERS." The spokesman said Asubonten's departure is being treated as a "personnel matter" and therefore no further information would be provided. His place will be taken on an interim basis by Marlene Timberlake D'Adamo, CalPERS' chief compliance officer. D'Adamo also served as interim CFO after the departure of Cheryl Eason in 2016.

CalPERS also declined to discuss the timing of Asubonten's departure. But at the May 15 meeting of the board's finance and administrative committee, at which he had been scheduled to give as many as six presentations, his place was taken by D'Adamo. Asubonten could not be reached Monday for comment.

Asubonten's departure should intensify questions about whether CalPERS management and its board members are up to the task of overseeing a $350-billion retirement and healthcare system serving more than 3 million present and past public employees and their families. The questions apply not only to Asubonten's qualifications, but the process that led to his appointment to a post with responsibilities requiring top-flight management skills and experience.

Treating his departure as a state secret won't quell these doubts. That's especially so given what appears to be CalPERS management's complicity in exaggerating Asubonten's work experience. CalPERS should come clean about the process.

Asubonten was named as CFO of the California Public Employees' Retirement System in September. As we reported last month, questions were raised by the financial blog nakedcapitalism.com about whether he had experience commensurate with the job, amid signs that his resume may have overstated his experience.

Among other issues, Asubonten claimed to have served as "managing director" of a private equity firm before joining CalPERS, an assertion CalPERS repeated in its press release announcing his appointment last year.

But that looked misleading: The "private equity firm" was a consulting firm Asubonten had founded that did no investing of its own. Rather, as Asubonten acknowledged in an interview with The Times, it consulted for investors overseas. Asubonten declined to discuss the scale of those investors. The managing director title appeared to be one he bestowed upon himself.
Let's face it, CalPERS screwed up "bigly" hiring Charles Asubonten as its CFO. This guy doesn't have the credentials to be the CFO of a $350 billion pension fund.

By the way, the CFO position is one of the most important positions for a lot of reasons and I think it's a critical position, so you need to hire the right person with the right qualifications for such an important job.

For example, Canada’s CFO of the Year Award finalist Nathalie Bernier knows this first-hand: the CFO of PSP Investments (PSP) has been leading the strategic transformation of her organization:



Take the time to read this interview with Nathalie Bernier to understand the responsibilities of a highly qualified CFO at a large pension fund.

I've seen a few qualified CFOs in my career, one of the best was Paul Buron, the former CFO of the Business Development Bank of Canada (BDC) who is now Executive Vice-President, Government Mandates and Programs Management at Investissement Québec (no, he didn't pay me to say this, I hardly know the man but was very impressed with his work ethic, leadership, and capabilities, he's as solid as they come).

Anyway, all this to say, if you're going to hire a CFO, get a top-notch CFO and pay them properly.

As far as CalPERS bringing private equity in-house, it's not what you think, it's basically a new structure to circumvent stupid compensation policies that don't allow CalPERS to pay its PE staff properly.

Capiche? Stop reading naked capitalism and start reading more Pension Pulse, I get straight to the point and I'm not going to waste your time with nonsense.

As always, if you have anything to add, email me at LKolivakis@gmail.com and I'll be glad to discuss.

Below, CalPERS CIO Ted Eliopoulos discusses the pension fund's launch of two new private equity funds, investing strategy and his departure from CalPERS. He speaks with Erik Schatzker on "Bloomberg Daybreak: Americas."

Notice how Ted explicitly states CalPERS will continue investing in PE funds but needs scale, which it will get through large co-investment opportunities through these existing relationships. It still needs to create a structure to hire qualified PE staff to quickly and thoroughly evaluate these co-investment opportunities as they arise.

And former CalPERS board member JJ Jelincic sent me the latest Performance, Compensation and Talent Management Committee and told me: "Look at minutes 40-50 about the ability to pay salaries. For context Richard Gillihan is the director of the California Department of Human Resources (the old department of personnel administration)."

I thank JJ for sharing this clip, it pretty much confirms my long-held belief that CalPERS has not kept pace with setting competitive compensation even though the board has the authority to do so.


Monday, May 21, 2018

BCI's Toxic Work Environment?

A little over a month ago, Barry Critchley of the National Post reported, 'They’ve treated people like dirt': Equity group layoffs at $135 billion BCIMC raise questions about morale:
The BC Investment Management Corp., one of the country’s largest pension managers, has laid off “about 20” of its investment professionals, a mix of analysts and portfolio managers who largely worked in equities.

The layoffs, most of which took place in February and affected approximately half of the equities group, have according to sources hurt morale at the organization, which manages $135 billion of assets.

“People are very concerned about their jobs,” said one observer.

Part of the problem was the sudden, and seemingly chaotic way in which the layoffs were carried out.

On the day of the layoffs, a source said, emails were sent advising some staff to go to one location and the rest to another, to hear the good or bad news. But some wound up in the wrong room and had to be pulled out and redirected before the news was delivered.

The decision to cut employees was made a few days after the manager’s human resources department issued a note advising assistance was available to those feeling stressed.

For some employees, stress reduction has apparently come from venting their frustration on the website Glassdoor, a job site that contains reviews of employers. “Terminations and re-orgs are now the status quo,” said a recent anonymous post.

The layoffs have left some wondering how replacements will be found given the relative lack of money management talent in Victoria.

BCIMC has stated its plan is to internalize active management on a global basis, and the investment managers needed — who would most likely have to be recruited from Calgary, Toronto or Montreal — may rethink given what’s happened.

“In a nutshell they’ve treated people like dirt,” noted the observer, adding the approach was “different” from that employed by former chief executive Doug Pearce who left in mid-2014. “Doug had a different philosophy, one that was more of a cultural fit with Victoria.”

One pension fund consultant said if such employee cuts were made by a private sector manager, the clients “would have responded and fired the manager. But in bcIMC’s case, the clients are captive.” In all, bcIMC has 31 institutional clients with almost 98 per cent of the assets being either public sector pension funds or from “government bodies.”

“It’s (essentially) part of the government, but has now added this Wall Street mentality. What’s the board doing?” asked the consultant.

The layoffs are the latest in a series of changes that kicked off almost four years back when Gordon Fyfe replaced Pearce as chief executive. Fyfe was the former chief executive of the $90 billion PSP Investments.

Over time, Fyfe has hired a number of former PSP staffers: of the nine members of its executive management team, three came from PSP, five are long-term employees and one came from a fund outside Canada.

“I think they wanted new people, a bit of a housekeeping exercise,” is how the observer described the personnel and structural changes.

The pension fund’s stated goal of becoming “an in-house asset manager that uses sophisticated investment strategies and tools,” has meant a greater allocation to private equity, mortgages, real estate, renewable resources and infrastructure. In 2016 it launched QuadReal, a real estate manager.

For whatever reason, the fund’s three-year plan of internalizing the investment management and cutting ties with external managers has progressed more slowly than expected.

Last fall, Daniel Garant, a former PSP first vice-president, came on board, an arrival that coincided with the departure of Bryan Thomson, senior vice president of public equities.

Garant is now senior vice-president public markets.

We sought comment from bcIMC on staff cuts, severance costs, morale and progress on the plan to internalize investment management.

“I’m respectfully declining your request as BCI does not publicly comment on or discuss personnel matters,” a spokesperson said.
It's Victoria Day in Canada so a lot of people are off. I was reading a Bloomberg article on how the hottest market in the world for luxury real estate is sleepy Victoria, British Columbia:
Victoria was only fifth-hottest based on average price -- up 6 percent to $1.2 million from 2016, with a high of $9 million -- behind Paris; Washington; Orange County, California; and San Diego. But the little city of afternoon teas and lush gardens soared when it came to sales volume and speed, which Christie’s weighted more heavily. The number of sales grew by 29 percent from 2016, while the average time to find a buyer was only 32 days, among the fastest turnover anywhere.
Anyway, the folks at bcIMC aren't sleeping well these days. And judging by the nasty reviews on glassdoor.ca, some are downright pissed at its CEO and senior managers (click on images):





I can go on and on but you get the picture by reading all the reviews, there are a lot of very pissed off former and current employees at bcIMC which is now called BCI.

You can dismiss these reviews as coming from a bunch of disgruntled employees but it's not that simple.

You see, while I like BCI's new website and think it's about time they revamped it, I was shocked and dismayed when I read this article and kept thinking to myself: "Didn't Gordon learn anything from his time at the Caisse and PSP?"

Importantly, if the above is true and on the day of the layoffs emails were sent advising some staff to go to one location and the rest to another, to hear the good or bad news but some wound up in the wrong room and had to be pulled out and redirected before the news was delivered, then this is grossly inhumane and a major screw-up on the organization's part (I can just see the employment lawyers having a field day: "Write down everything that happened in detail, don't leave any detail out).

Quite frankly, these type of things should never happen at BCI, PSP, the Caisse, or any other large Canadian pension fund. They shouldn't happen anywhere, period.

Sure, there are reorgizations and layoffs that take place and sometimes you need to make difficult decisions and cut staff but for god's sake, do it with compassion and empathy, show people the respect and dignity they deserve especially when your cutting their livelihood.

BCI's Board should also take note. I know Gordon told them that he has free rein to hire and fire people at will. In fact, I'm sure that was one of his stipulations for taking this job, but pay attention to the turnover rate and get some exit interviews from former employees to see how they were treated and to see if they were in fact treated fairly and justly (when I was let go from PSP, the turnover was an astonishing 36%, it was just nuts!).

By the way, this is the same advice I have for the boards at all of Canada's large pensions because every time I see this type of butchering, it brings back bad memories. You might have good reasons to lay people off but always treat them with respect and dignity.

As for Gordon, he did exactly what I was expecting him to do, focusing on private markets and hiring people from PSP. No shock there and he might have good reason to carry out some of these layoffs but the brutal way they were carried out was unjustified and a major screw-up and it sends the wrong message to BCI's employees, not to mention it kills morale.

That's something Mr. Fyfe needs to own as he travels to India and around the world and so does BCI's Board and senior managers:



One last thing, something a friend of mine who almost went to work at bcIMC when Doug Pearce was the CEO shared with me:
I think that Gordon underestimated exactly how small Victoria is.

His predecessor recruited people by telling them that they had to move to Victoria and become part of the community.

When I was approached to join bcIMC, I asked them if I could commute back and forth from Vancouver. The answer was no.

Gordon is breaking that promise (hence, the comment about a Wall Street approach). Funny, he is from Victoria so he should know this. He probably underestimates how badly it will be received.
My friend is right, I think Gordon really underestimated how badly this will be received. I certainly hope he learns from this blunder and that he finds a way to boost morale at BCI (no easy task after such a traumatic event).

Folks, this is Victoria, British Columbia, it might be a stunningly beautiful place to live but nobody in their right mind is going to take a job out there where house prices are surging to the stratosphere and live with the threat of being fired at any time.

Lastly, while I take issue with the way this reorganization was handled, I agree with those who argue that B.C.'s pension investments should stay in the hands of pros:
As finance minister in the last B.C. Liberal government, Mike de Jong relished those briefings with the credit rating agencies where he would be asked “tell us about your pensions.”

The agencies were on the lookout for unfunded liabilities, brought on by politicians granting hefty taxpayer-financed retirement benefits to public sector workers while neglecting to fund those guarantees going forward.

“Happily, that is not the story that we have,” de Jong would tell the analysts. “Our joint custody public sector pension plans are well-managed. They are well-funded and that’s important for people that want to know that the security exists around their retirement future.”

The good news story continues under the current NDP government. When New York-based S&P Global this spring reconfirmed its top-ranked Triple A credit rating for B.C., among the reasons was: “We consider the province’s pension liabilities very manageable and not a risk for B.C.’s finances.”

Here’s Toronto-based DBRS on the same subject: “The province has limited unfunded pension liabilities. As of March 31, these are projected to be $187 million, one-tenth of one per cent of gross domestic product. Unfunded pension liabilities are expected to remain low.”

The most recent edition of the audited financial statements of the province indicate that, far from falling short of obligations, three of the four public pension plans are overfunded.

For the main pension plan for provincial public servants, assets totalled 106 per cent of obligations. The plan for municipal workers weighed in at 104 per cent and the one for college and university employees topped out at 103 per cent.

Only the teachers’ pension plan lagged, with assets matching only 97 per cent of obligations, a shortfall of $372 million. As the plan, like the other three, is joint trusteed, the liability is shared equally between teachers and provincial taxpayers, needing a top up from both.

“The pension story doesn’t attract a lot of attention here in B.C.,” as de Jong noted in one of his briefings near the end of the Liberal term of office, “but it is a very positive one and one that distinguishes us from circumstances that exist in many other jurisdictions around North America.”

While basking in the glory of fiscal responsibility, he ought to have acknowledged the debt to the previous NDP government and the public sector unions. Together in the late 1990s, they engineered the current fully-funded joint trusteeships.

Ironically, the current NDP government was called to account this week over reports that the current plans are significantly invested in the fossil fuel industry.

Holdings include Kinder Morgan, developer of the Trans Mountain pipeline expansion, which the B.C. New Democrats oppose. As noted here recently, the B.C. pensions also have a stake in Cheniere Energy, the U.S.-based rival to B.C.’s hopes of developing a liquefied natural gas industry.

When Premier John Horgan was challenged about his own MLA pension and others in the public sector being partly invested in Kinder Morgan and other fossil fuel companies, he didn’t deny the optics.

“It may raise a few eyebrows,” Horgan conceded to reporters Tuesday. “Often times this looks bizarre to the public.” He also made the point that the plans are managed independently — and managed well — by professionals working for the B.C. Investment Management Corp.

BCIMC is jointly overseen by the unions and government. The unions fill a majority of seats on the seven-member board of directors, which hires the management and shapes the investment policies, so the government could not by itself bring about a change of direction.

There’s been talk of the New Democrats and unions working together to shift toward more progressive investment strategies. However the pension corporation is already active on that score.

“As we believe that companies that manage environmental, social and governance (ESG) matters perform better over the long term, we integrate responsible investing into our approach and processes across all asset classes,” writes CEO Gordon Fyfe in the covering letter to the corporation’s latest report on responsible investing.

Rather than simply divesting as some activists prefer, BCIMC prefers to seek change by engaging directly with companies via its holdings in their shares.

With Rio Tinto and Suncor Energy, BCIMC joined other investors in successfully supporting “proposals that called for additional disclosure relating to the companies’ exposure to climate change risks.” With Anglo American mining, it backed a requirement to report annually on the resiliency of its business model under different climate change scenarios for 2035 and beyond.”

More quixotic was backing a proposal that did not pass, calling on the Potash Corporation of Saskatchewan “to assess its human rights responsibilities related to sourcing phosphate rock from Western Sahara.”

The investment corporation joined others in defeating excessive compensation and bonus schemes at Canadian Pacific Railway, Crescent Point Energy and BP. “Our primary focus is on pay for performance,” to quote the responsible investing report.

BCIMC’s performance in managing $135 billion worth of assets — witness the testimonials of the auditors, the actuaries and the credit rating agencies — has made its executives and managers among the highest paid in the public sector.

All that could change if more politically-active folks in the government and the unions decided to remake the board and its investment strategies.

An activist takeover could also risk returns on investments, which is why it would be wiser to keep the job with the professionals and out of the hands of the politicians.
British Columbia's NDP government better stay out of BCI's investment decisions. It's already screwed up with the Kinder Morgan pipeline expansion and now Bill Morneau is looking at Canadian pension funds to save that deal. It might happen but the terms have to be favorable to Canada's large pensions.

Below, discover Victoria, British Columbia. My aunt and uncle are visiting from Crete and they stopped off there before heading to Seattle to see my nephew. They said they loved Vancouver and particularly loved Victoria. I'm sure it's a beautiful place to visit, not sure I'd want to work there.

Enjoy your Victoria Day and for the folks that were laid off at BCI, close the chapter, focus on your health, move away and find a job somewhere else. It's not going to be easy but that's my best advice.

Friday, May 18, 2018

Top Funds' Activity in Q1 2018

Julia La Roche reports, Here's what the biggest hedge funds have been buying and selling:
The stock trades that the biggest hedge fund managers made in the first quarter have been revealed.

Hedge funds of a certain minimum size are required to disclose their long stock holdings in filings to the SEC known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. What’s more is these filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the positions.

Still, it does provide a partial look into where some of the top money managers have been placing money in the stock market.

Facebook gains friends

Facebook’s stock was featured prominently in the news during the first quarter after the Cambridge Analytica data breach scandal came to light and CEO Mark Zuckerberg was grilled on Capitol Hill. Still, many hedge funds grabbed shares of the social network.

Tiger Global, led by Chase Coleman, added 2,545,238 more shares of Facebook (FB). Coleman’s fund is a “Tiger cub,” or a hedge fund that was seeded by legendary hedge fund manager Julian Robertson of Tiger Management.

Billionaire “Tiger cub” Andreas Halvorsen’s Viking Global also loaded up on Facebook during the first quarter, adding 5.5 million more shares, bringing the entire stake north of 9.3 million shares. Fellow “Tiger cub” billionaire Rob Citrone of Discovery Capital also added to his Facebook stake, buying 806,600 more shares, bringing the fund’s position to 1.37 million shares. Citrone’s Discover Capital also bought calls on 2.3 million Facebook shares. Facebook remained the No. 1 position for Viking and Discovery.

Daniel Loeb, the activist hedge fund manager and CEO of Third Point, added another 600,000 shares to his existing Facebook stake, bringing the total position to 4 million shares at the end of the quarter. David Tepper, the founder of Appaloosa, also boosted his Facebook stake, adding 680,559 more shares to last hold just over 6.2 million at the end of the quarter.

Activist hedge fund manager Barry Rosenstein’s JANA Partners sold its entire stake in Facebook, dropping 473,526 shares in the quarter. Billionaire Stanley Druckenmiller’s family-office hedge fund Duquesne Capital sold its entire Facebook stake of 1.08 million shares.

Dropping Apple

Tepper’s Appaloosa and Larry Robbins’s Glenview Capital both exited their Apple (AAPL) stakes in the first quarter. Philippe Laffont’s Coatue sold just over half of its Apple stake during the quarter.

Bloomberg noted that institutional investors abandoned Apple at a rate not seen since 2008.

Meanwhile, Warren Buffett’s Berkshire Hathaway added nearly 75 million shares of Apple during the first quarter, bringing the entire stake to just over 239.5 million shares, a position valued at more than $44.6 billion as of Tuesday’s close.

Out of Amazon and into Alibaba

E-commerce was another area that saw a bunch of moves among the hedge funds.

Discovery Capital ditched all of its Amazon (AMZN) shares during the first quarter. Viking Global also shed most of its Amazon stake, selling 482,469, or about 93% of the position. Viking last held 35,751 shares of the e-commerce giant.

Meanwhile, Viking initiated a new position in Chinese e-commerce giant Alibaba (BABA), snapping up 2.2 million shares. Citrone’s Discovery Capital also boosted its Alibaba stake.

Lee Ainslie, another “Tiger cub and the founder of Maverick Capital, also added to Alibaba.

Loeb’s Third Point trimmed its Alibaba stake, selling 2 million shares to last hold 4 million of the e-commerce giant. Tepper’s Appaloosa also slightly pared back its Alibaba stake. The position remained a top 5 long equity holding for both Loeb and Tepper.

Cutting cable

Cable providers also saw some action. Laffont’s Coatue and Halvorsen’s Viking Global both bailed on Time Warner (TWX), dumping their entire positions during the first quarter. Loeb’s Third Point sold 2 million shares of Time Warner and instead purchased call options on 2 million shares.

Rosenstein’s JANA Partners, Julian Robertson’s Tiger Management, and Tiger Global closed their stakes in Comcast (CMCSA).

Healthcare moves

And lastly, healthcare stocks, which have been in the news frequently during the first quarter, gained favor among the hedge funds.

Billionaire Leon Cooperman’s Omega Advisors and Julian Robertson’s Tiger Management disclosed new positions in UnitedHealth Group (UNH). Rosenstein’s JANA Partners also snapped up a new position in Anthem (ANTM), while Robertson’s Tiger Management trimmed its stake by about half.

Billionaire Larry Robbins, the founder of Glenview Capital, disclosed a new stake in Express Scripts (ESRX). Robbins pitched Express Scripts as a long idea at the Sohn Conference earlier this month while downplaying the threat that Amazon poses to the healthcare industry, specifically the pharmaceutical sector.

Loeb’s Third Point exited its position in health insurer Aetna (AET), selling 1.85 million shares.

Below is a roundup of the biggest funds’ first quarter moves:

Appaloosa Management (David Tepper)
New: Wells Fargo (WFC)
Boosted: Micron Technologies (MU), Facebook (FB), Allergan (AGN)
Exited: Apple (AAPL)

Baupost Group (Seth Klarman)
New: PG&E (PCG), Tesla (TSLA) (PRN)
Boosted: Pioneer Natural Resources (PXD), 21st Century Fox (FOXA)
Trimmed: Amerisource Bergen (ABC)
Exited: Express Scripts (ESRX)

Coatue Management (Philippe Laffont)
New: Micron Technologies (MU), TAL Education (TAL)
Boosted: Twitter (TWTR)
Trimmed: Apple (AAPL), Nvidia (NVDA), Netflix (NFLX), Snap Inc. (SNAP)
Exited: Bank of America (BAC), Time Warner (TWX), Alphabet (GOOGL)

Discovery Capital (Rob Citrone)
New: iShares MSCI Emerging Markets ETF (EEM)
Boosted: Alibaba (BABA), Facebook (FB)
Exited: Amazon(AMZN), Bank of America (BAC)

Duquesne Capital (Stanley Druckenmiller)
New: Micron Technologies, Alibaba, Netflix
Exited: Facebook, Wells Fargo

Glenview Capital (Larry Robbins)
New: Express Scripts (ESRX), FedEx (FDX), Facebook
Trimmed: Anthem
Exited: Apple (AAPL)

JANA Partners (Barry Rosenstein) 
New: Anthem (ANTM), AutoDesk (ADSK)
Boosted: Pinnacle Foods (PF), Jack In The Box (JACK)
Exited: Facebook (FB), Comcast (CMCSA)

Maverick Capital (Lee Ainslie)
New: Mohawk Industries (MHK)
Boosted: Alphabet (GOOG), Alibaba (BABA), Intel, Lowe’s (LOW)
Trimmed: Molson Coors (TAP)

Marcato Capital (Mick McGuire)
New: Univar (UNVR), Astec Industries (ASTE)
Boosted: InterActiveCorp (IAC)
Exited: Sotheby’s (BID)

Omega Advisors (Leon Cooperman)
New: Thermo Fisher (TMO), UnitedHealth
Boosted: United Continental (UAL), Citigroup (C)
Trimmed: Shire (SHPG)
Exited: Zynga (ZNGA)

Pershing Square Capital (Bill Ackman)
New: United Technologies (UTX)
Trimmed: Restaurant Brands (QSR), Mondelez (MDLZ), ADP (ADP), Howard Hughes (HHC)
Exited: Nike (NKE)

Third Point LLC (Daniel Loeb)
New: United Technologies, Wynn Resorts (WYNN)
Boosted: Facebook, TimeWarner (TWX) (CALL)
Exited: Aetna (AET), TimeWarner (TWX)

Tiger Global (Chase Coleman)
New: Twitter (TWTR)
Boosted: Facebook, Netflix (NFLX)
Exited: Comcast (CMCSA), Alphabet (GOOGL) (GOOG)

Tiger Management (Julian Robertson)
New: Royal Caribbean Cruises (RCL) (CALL), UnitedHealth Group (UNH), Workday (WDAY), eBay (EBAY)
Boosted: JPMorgan Chase (JPM)
Trimmed: Anthem (ANTM)
Exited: Comcast (CMCSA), S&P500 SPDR ETF (SPY) (PUT)

Viking Global (Andreas Halvorsen)
New: Alibaba (BABA)
Boosted: Facebook (FB), Wells Fargo (WFC), Anthem
Trimmed: Amazon (AMZN)
Exited: TimeWarner (TWX)
This week, I will focus on what top funds bought and sold in the first quarter.

Before I begin, please take the time to read some of my recent market comments:
I want you to start thinking macro, macro, macro because in my opinion there are some interesting macro trends going on right now and you really need to pay attention or else you risk losing a lot of money.

In particular, pay attention to the US dollar (UUP) and emerging market equities (EEM) which have been selling off strongly this year and have been volatile (click on images):



As shown above, the US dollar ETF is at its 200-week moving average and it might rally a bit more here but I think it will pull back before resuming its uptrend. If I'm right, this will give some breathing room for emerging market stocks to rally off their 50-week moving average, but use any rally to go underweight or initiate a short position.

The sell-off in US long bonds (TLT) has also hit emerging market stocks hard as the yield on the 10-year Treasury note hit 3.1% this week, a five-month high (click on image):


Now, I realize some people are convinced yields on the 10-year are headed to 4% or higher. I'm not one of them and still maintain this is nothing more than a bond teddy bear market and going forward US long bonds (TLT) will offer the best risk-adjusted returns of all asset classes.

One of my blog readers out in Vancouver who tracks me closely shared this with me earlier today: "I hope you don’t mind me saying that sometimes I think you’re crazy in pounding the table for TLT in the face of its declines; but then I remember that you did the same with biotech a couple of years ago, arguing that we should buy as it continued to decline, and you were proven to be exactly right."

He's right, I was pounding the table on biotech stocks (XBI) right before the US elections when I covered America's Brexit or biotech moment, but nobody was paying attention to me back then, much to their demise (click on chart):


I still like biotech shares but my focus is on individual names which swing both ways, not the ETF.

All this to say, call me crazy for liking US long bonds but in the end, I will be proven right as we head into year-end. Yields on the 10-year Treasury note will be considerably lower, especially if we get some crisis in emerging markets or Europe.

Even if we don't, the US and global economy are cooling, and this will weigh on inflation expectations, propelling US long bond prices (TLT) higher.

Anyway, enough macro, let's get into what top funds bought and sold during the first quarter. You will notice from the article above, a lot of these big hedge funds buy and sell the same stocks, namely, large-cap tech stocks.

Why is that? Well, because they're too big, they need liquidity, and consequently, their biggest positions are by definition going to be concentrated in big tech stocks that swing.

Go back to read my comment at the end of Q1 when I wondered whether a quant style crash finally arrived. In that comment, I looked at daily and weekly charts of Amazon (AMZN), Facebook (FB), Twitter (TWTR) and Tesla (TSLA) using very simple 50, 100 and 200-day and week moving averages.

I had a strong suspicion that big hedge funds were buying the dip on Facebook, Amazon, and Twitter back then and I was right.

Good for them, they made money but let me show you something else. Go to barchart.com and click on stocks at the top of the page and then on percent change. Your screen should look like this (click on image):


Once you click on percent change, change the setting from "today" to "year to date" and your screen should look like this (click on image):


If you're a stock junkie like me, you're scrolling on this site every single day, trying to see what are the biggest gainers, losers and which stocks are making new 52-week highs and lows.

One thing you will notice, a lot of these stocks aren't well-known and none of the big hedge funds are buying them either because they're too small in terms of capitalization or they don't have the expertise in a certain sector (like biotech). [Note: To be fair, Farallon Capital Management did put CRISPR Therapeutics (CRSP) on my watch list back in Q4].

I bring this to your attention because a) the data is free b) the best-performing stocks aren't FANG stocks and c) there is so much more to the stock market than ETFs (it's not the stock market, for me, it's always a market of stocks).

But picking stocks, especially no-name stocks, isn't for everyone, that's why everyone wants to know what David Tepper, Warren Buffett and the billionaire "big boys" are buying.

I get it, I look at their portfolios too but unlike you, I can screen each of their positions rigorously and tell you what I like and don't like going forward.

For example, a couple of weeks ago, I told you not to sell in May and go away, and told you that Buffett bought 75 million shares of Apple in Q1 but I was pounding the table to buy those shares right before earnings when the stock fell below its 200-day moving average (click on image):


But I also told you not to follow Buffett blindly and to wait for another nice buying opportunity. Shares of Apple have since sold off a bit and that's normal as traders sell the Buffett news.

I also told you about another big holding of Buffett's, Kraft Heinz (KHC), a stock which has been clobbered this year (click on image):


It's not the only consumer staple stock to get whipped hard this year. Check out shares of Campbell Soup Company (CPB) which are down 12% today and just getting killed thus far this year (click on image):


I remember a day back at the height of the crisis in 2008 when every single stock in the S&P 500 was down except for Campbell Soup. It's not getting any love now but if markets go haywire, I'm sure it and Kraft Heinz will benefit.

Anyway, back to Buffett and Berkshire. If you go to Berkshire Hathaway's top holdings and then click twice on the fourth column (Change (%)), you will see Berkshire has a concentrated portfolio of 48 positions and see where it increased its stakes (click on image):


Yes, Buffett bought 75 million shares of Apple but he also doubled his stake in Teva Pharmaceuticals (TEVA), one of my core longs which had nothing to do with Buffett and everything to do with David Abrams who bought 20 millions shares before Buffett's lieutenants bought stakes (click on image):


Now, Abrams got hurt when the stock flushed and hit a 52-week low of $10.85 in November and that's when Buffett's lieutenants initiated a position (and so did yours truly).

What I find interesting is if you look at Teva's top institutional holders, you will see Berkshire and Abrams but also J.P. Morgan which significantly increased its stake (and so did Bill Miller but he's not a top holder).

Why am I bringing this up? Because Buffett, Bezos and Diamond are trying to reduce healthcare costs in America and I think they're cooking something up here.

Now, don't go buying shares of Teva based on a hunch or because Berkshire and J.P. Morgan increased their stake in Q1, I'm just telling you from all of Buffett's top picks, this is the one I find most interesting going forward (and it wasn't Buffett but his lieutenant Todd Combs who bought it).

The other reason I'm bringing this up is that I remember "BOOYAH" Jim Cramer, CNBC's resident claptrap, telling his Mad Money viewers "Don't touch it! I'd rather you own Teva sandals":



Shares of Teva were trading near their low at the time, and when I heard Jimbo spew his wisdom, I doubled my position. He was totally wrong! (he's gotten better but still stinks and I can't watch his show without getting highly irritated)

People really need to learn to trade on their own. Stop watching Mad Money and just go out there and risk your own capital. Learn how to look at charts using stockcharts.com, plotting one-year daily charts and 5-year weekly charts and start by using 50, 100, and 200 day and week moving averages and look for MACD crossovers (you can do this for free on stockcharts.com).

Then you can look at the portfolios of gurus or any stock Jim Cramer or others are recommending and make a more informed decision.

At the top of this comment, you'll see a picture of David Tepper. Zero Hedge had a comment on Friday on how Tepper trounced his competition, gaining 7% YTD.

I always thought Tepper's Appaloosa  was a L/S Equity fund but apparently it's a multi-strategy fund and he made money shorting bonds this year (I put a link to his fund under multi-strategy funds below).

Anyway, have look at Appaloosa's top holdings and you'll see he increased his stakes in Micron Technology (MU), Facebook (FB) and Alphabet-Google (GOOG) but he also did a lot of other under the radar moves (click on image):


Now, I don't have time to go over every single position but let's look at  Micron Technology (MU) because Coatue also bought a new stake in the company and is one of the top institutional holders (click on image):


When I look at the daily chart, I'm hardly enthused but the weekly chart doesn't convince me either even though it’s still bullish (click on images):



Also, in my recent comment on whether we're setting up for a summer rally, I ended by stating: "I'm not willing to bet on chip stocks (SMH) at this time and fear that a global slowdown will crush a lot of them going into year-end."

I would be shorting chip stocks going into year-end but I'm not the one charging 2 and 25 on billions like David Tepper and other hedge fund gurus. Just be careful, never follow anyone blindly based on what they supposedly bought and sold last quarter.

Are there any other things I saw going over some top funds? I noticed quant superstar Two Sigma made a great call increasing its stake on Best Buy (BBY) while Citadel lost big increasing its stake on Esperion Therapeutics (ESPR) right before the stock got crushed (click on images):



You might be tempted to "sell the rip" on Best Buy shares and "buy the dip" on Esperion Therapeutics but there is no secret sauce to making money trading stocks. Sometimes you have to buy the dips, other times the rips, and sometimes you need to stay put and do nothing.

I hope you enjoyed this comment, it's a bit long but the scary thing is I only scratched the surface. For a stock junkie like me, I love going over stocks, charts and peeking into portfolios of top funds to see if they added on weakness or sold on strength.

Those of you who want to track my current market ideas on stocks can do so by following me on StockTwits here. I try to post daily but sometimes I just don't post at all because I'm way too busy trading, reading and blogging.

Here are some of the stocks moving up and down on my watch list on Friday, May 18th 2018 (click on images):



Please remember that my comments are free but I appreciate readers who take the time to donate or subscribe via PayPal on the right-hand side, under my picture (go to web version on your mobile). I thank all of you who kindly support my blog through your dollars, it's greatly appreciated.

Anyway, have fun looking at the first quarter activity of top funds listed below. The links take you straight to their top holdings and then click on the fourth column head, % chg, to see where they decreased (click once on % chg column head) and increased their holdings (click twice on % chg column head).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Appaloosa LP

2) Citadel Advisors

3) Balyasny Asset Management

4) Farallon Capital Management

5) Peak6 Investments

6) Kingdon Capital Management

7) Millennium Management

8) Eton Park Capital Management

9) HBK Investments

10) Highbridge Capital Management

11) Highland Capital Management

12) Pentwater Capital Management

13) Och-Ziff Capital Management

14) Pine River Capital Capital Management

15) Carlson Capital Management

16) Magnetar Capital

17) Mount Kellett Capital Management 

18) Whitebox Advisors

19) QVT Financial 

20) Paloma Partners

21) Weiss Multi-Strategy Advisors

22) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation (Paul Tudor Jones)

8) Tiger Management (Julian Robertson)

9) Discovery Capital Management (Rob Citrone)

10 Moore Capital Management

11) Point72 Asset Management (Steve Cohen)

12) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

13) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Quant and Market Neutral Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Cubist Systematic Strategies (a quant division of Point72)

6) Numeric Investors

7) Analytic Investors

8) AQR Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Princeton Alpha Management

14) Angelo Gordon

15) Quantitative Systematic Strategies

16) Bayesian Capital Management

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Viking Global Investors

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) Tiger Global Management (Chase Coleman)

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Penserra Capital Management 


29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners


53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Marshall Wace

63) Light Street Capital Management

64) Honeycomb Asset Management

65) Rock Springs Capital Management

66) Whale Rock Capital

67) Suvretta Capital Management

68) York Capital Management

69) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Birchview Capital

10) Ghost Tree Capital

11) Sectoral Asset Management

12) Oracle Investment Management

13) Perceptive Advisors

14) Consonance Capital Management

15) Camber Capital Management

16) Redmile Group

17) RTW Investments

18) Bridger Capital Management

19) Boxer Capital

20) Bridgeway Capital Management

21) Cohen & Steers

22) Cardinal Capital Management

23) Munder Capital Management

24) Diamondhill Capital Management 

25) Cortina Asset Management

26) Geneva Capital Management

27) Criterion Capital Management

28) Daruma Capital Management

29) 12 West Capital Management

30) RA Capital Management

31) Sarissa Capital Management

32) Rock Springs Capital Management

33) Senzar Asset Management

34) Southeastern Asset Management

35) Sphera Funds

36) Tang Capital Management

37) Thomson Horstmann & Bryant

38) Venbio Select Advisors

39) Ecor1 Capital

40) Opaleye Management

41) NEA Management Company

42) Great Point Partners

43) Tekla Capital Management

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

39) Victory Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) CI Investments

20) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, CNBC’s Leslie Picker reports on new investments from big investors such as Warren Buffett, Bill Ackman and Leon Cooperman.

And as David Tepper gets set to buy the Carolina Panthers from team founder Jerry Richardson for a record $2.2 billion, I quite enjoyed this interview below at Carnegie Mellon, his alma mater. I like his no bs style when talking to these students, it's refreshing.